What a night.
Stocks in Europe and the US surged, crude oil roared higher taking almost the entire commodity complex with it, and the Aussie dollar continued its recovery off the 73 cent level traders tried, but failed, to punch it through yesterday. It’s at 0.7373 this morning.
Even iron ore was higher overnight.
That sets up a very positive day on the ASX which had a cracker yesterday, defying the weakness in the miners to post a 0.42% gain and finish at 5342.
The 222 point rally in the Dow and the 26 point lift in the S&P 500 has lifted futures on the ASX with the June SPI 200 contract up 30 points, 0.6%. That suggests the market will attempt to take out May’s highs at 5357. That’s an important technical level as well, so traders will be watching closely.
Here’s the scoreboard (7.25am):
- Dow: 17,928, +222 (+1.26%)
- S&P 500: 2,084, +26 (+1.25%)
- SPI200 Futures (June): 5,364, +30 (+0.6%)
- AUDUSD: 0.7373, -0.0070 (+0.82%)
Now, the Top Stories
1. What a wild week commodities and miners are having. The volatility in markets at the moment, granted within some now established ranges, is huge. In London trade last night the miners, and commodities, roared back from the previous night’s massive losses.
After a bad day on the ASX yesterday BHP rallied 2.735% in London, Rio was 1.85% and Glencore was 1% higher. Anglo American rallied hard up 4.71% and Vale bounced 6.32%.
These are not normal daily moves. Especially those in Anglo and Vale. This speaks to not only the underlying volatility of commodities but also clearly signals that traders in what should be long term stocks like these miners is becoming ever more short term in nature.
It’s also a reminder to traders that in 2016, much more than is usual, traders and investors need to get the time frame of their positions and trades right. Otherwise, the volatility is likely to cart them out with losses.
2. BHP is signalling a long-term focus – CEO Andrew Mackenzie is not waiting for prices to recover. Traders might be jumping at every shadow and movement in the price of iron ore, crude and industrial metals but BHP CEO Andrew Mackenzie has signalled BHP is continuing on his process of cost reduction.
The FT reports that Mackenzie was speaking at the Global Metals, Mining and Steel Conference in Miami last night and said the Big Australian was not “waiting for prices to recover” and intends to make another $3.6 billion in productivity gains by the end of its 2017 financial year. The FT says the company is also investing to open up “latent capacity”.
Mackenzie’s message to shareholders was clear. “We have the financial strength and the flexibility to pursue a diverse range of opportunities and grow value per share at all points in the cycle, and we have a clear and simple strategy in place to deliver that growth,” he said.
he also suggested the company would be making a strong pivot toward copper.
3. The level of shorts on the ASX is striking, says SSGA and might explain the volatility. Olivia Engel, SSGA’s head of equity quant strategies in APAC, has run her eye over the level of shorts in the market at the moment and says it is “striking”. She says that helps explain overall volatility in the market.
She also says because the short sellers have been targetting the banks heavily it helps explain why the bounce in banks recently after poor interim results “are probably a symptom of above average short interest in the sector”. I’ve got more here.
4. Consumers confidence and sentiment tells us this is going to be a very close election. I said earlier in the week that there was a good chance we’d know the outcome of the election by the time the ANZ and Westpac measures of consumer confidence/sentiment were out this week.
Yesterday’s ANZ weekly consumer confidence wasn’t terrible but the budget didn’t give consumers a lift and it looks like only the RBA meeting held confidence up. That sets up a really interesting release today of the Westpac-Melbourne Institute consumer sentiment index for the month. Westpac said the survey was being taken up until Sunday – so this is as hot a read on confidence, the budget, and the election as we can get.
We’ll have full coverage at 10.30am. The key for traders is that while macro factors are driving, and will drive markets, the banks and real estate stocks may be impacted if it looks like there is going to be a change of government. But of course there are still 51 days and plenty of water to flow under the bridge before the election.
5. Traders need to change their focus on what economic data is important. Services rule, OK? That’s the area in developed economies that swamps manufacturing. Yet traders and the media always focus on measures of manufacturing, production, and PMIs. That makes sense because making stuff like cars, fridges, computers and smart phones seems so tangible. On the other hand making a coffee and selling it to a businessman on an advisory trip (tick off all the services you can think of she/he might have purchased) seems somehow ephemeral.
That focus on the tangibility of manufacturing is wrong-headed and completely misses the changed nature of developed market activity and employment. Increasingly it will also be the wrong focus for China and emerging markets as their middle class grows and services expands as a percentage of the economy.
Now that I’ve stopped ranting I’d recommend you read Elena Holodny’s excellent piece explaining why traders, investors and the media need to pay more attention to services.
Here’s a teaser from a Macquarie report she references – “Services have risen dramatically in importance and are increasingly dominant in shaping the outlook for global growth.” YUP!
6. Here’s a good indication that the Chinese yuan will eventually fall in value. May has only just begun but the Wall Street Journal reports that data provided by Dealogic shows that Chinese firms have spent $110.8 billion buying up firms in other countries so far this year. “To put that number into context, not only is it already a full-year record — surpassing 2015’s $106.8 billion — it is more than triple 2014’s year-to-date total, the previous high through this point in the year,” the WSJ says.
Things could get more frenzied in the back half of the year as authorities relax rules requiring Beijing’s approval before the deals are struck.
Why is it important for the currency. Two reasons. First you have to sell yuan to buy these foreign assets. And second, my guess is that the companies are spending while their yuan buys as many dollars, pounds, yen, and Aussie as they possibly can.
Key data for the past 24 hours (with thanks to BNZ markets)
CH: CPI (y/y%), Apr: 2.3 vs. 2.3 exp.
CH: PPI (y/y%), Apr: -3.4 vs. -3.7 exp.
GE: Industrial production (m/m%), Mar: -1.3 vs. -0.2 exp.
GE: Trade balance (bn), Mar: 26.0 vs. 20.6 exp.
UK: Trade balance, (mn), Mar: -3830 vs -4200 exp.
US: NFIB small business optimism, Apr: 93.6 vs. 93.1 exp.
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And now from CMC Markets’ Ric Spooner is today’s Stock of the Day
Only a month ago, CBA shareholders were facing the grim prospect of a bearish break below chart support at $70. After a 10% rally, shareholders are now confronted by the much happier possibility of a bullish break above resistance at $78.50. That would complete a double bottom pattern and create the prospect of a rally towards the next resistance level around $86.
Last week’s rate cut looks a pretty positive development for bank stocks on a 6-12 month view. No matter where you stand on the property “bubble” debate, it seems pretty unlikely that the banks are going to suffer a major deterioration in bad debts with mortgage rates this low and falling.
With 3 year bonds yields now down to about 1.6%, CBA’s dividend yield of 5.4% (7.6% after franking) could easily sustain a bit of a rally from current prices.
Ric Spooner, chief market analyst, CMC Markets
You can follow Ric on Twitter @ricspooner_CMC