6 things Australian traders will be talking about this morning

London New Years Firework, 2015. Photo: Rob Stothard/ Getty.

It’s a good morning, with news overnight that UK is getting a new prime minister this week. Teresa May became the last nominee standing for the Conservative leadership. And across the Atlantic the S&P 500 closed at a new all-time high.

European stocks were also stronger and the result is that the September SPI 200 futures contract is up 26 points, 0.5%, overnight. That suggests another solid day for local stocks although that strength is likely to be unevenly felt across the market. That’s because oil continues to slip, gold failed to break important resistance – again – and is down $20 an ounce from yesterday’s highs.

But overall financials and basic materials were up around half a per cent in the US suggesting the big stocks on the local market will support prices.

Elsewhere the commodity bloc pulled back a little. The Aussie is at 0.7531, the Kiwi at 0.7217 and the USDCAD is higher again at 1.3111.

Here’s the scoreboard (7.34am):

  • Dow: 18226 +80 (+0.44%)
  • S&P 500: 2137 +7 (+0.34%)
  • SPI200 Futures (September): 5,327, +26 (+0.5%)
  • AUDUSD: 0.7531 -00033 (-0.43%)

The top stories

1. US stocks make a new high – that’s uber bullish. Now I know there are going to be a lot of traders who want to sell this new high on the S&P 500. But if you are familiar with the famously successful Turtle trading approach you’ll know you buy strength and sell weakness. That’s often hard for trading folks who naturally want to fade rallies and sell offs. But Bob Byran reports that Tom Leveroni at Nautilus Research has a really bullish take on the overnight break to a new all-time high in the S&P 500.

Leveroni says the market has broken its previous record 17 times and each of those instances have been good news. “The only thing more bullish than a new 1 year high is a new multi-year high (i.e. > 2 year high) — 16 of 17 occurrences since 1928 gained 3 months later (avg + 4.44%) and all 17 occurrences were higher one year later,” he said.

The average return of the 17 breaks of highs on the S&P 12 months later? 8.54%! That’s 2317 folks.

2. ASX watch – closing the gap on the S&P and heading to 5400. The ASX had a great day yesterday and we saw 106 points of the 170 point catch up rally I talked about yesterday morning. That came after the ASX surged 2.04% to close at 5337. Overnight futures are suggesting another 24 points of gains for the local market when the physical ASX opens at 10am AEST today. That’s not going to quite close the gap between the directional correlation between the S&P 500 and the local market.

But it is going to put the ASX above 5360 as it closes in toward 5400 which has proved to be solid resistance for the market in recent months. So traders have a big question to ask themselves. Is the rally in US stocks enough to break the range high or is 5400 a bridge too far? The latest update of the S&P/ASX chart suggests more US equity market strength might be required to break the top of the recent range. Here’s the chart from my Reuters Eikon.

S&P 500 v ASX200 Daily (Reuters Eikon)

3. Goldman’s call that US 10’s are headed back to 2% is going to be a headwind for stocks, however bullish they get. Everyone knows that stocks are expensive on a PE basis relative to history. That’s something the Fed pointed out in the report that accompanied Janet Yellen’s recent testimony on Capitol Hill. But the Fed also pointed out that because bonds have rallied so hard stocks are not overvalued when viewed on a relative basis against stocks.

That’s because as interest rates collapse and bond rates fall the discount rate of future earnings collapses making the value of the income stream associated with stocks in present value terms rises. But the reverse is also the case. Rising bond rates increase the discount rate and relative value comparison between stocks and bonds which means rising rates are a threat to stock market valuations.

That’s not a risk while rates are rallying but David Scutt reports that Goldman Sachs analyst Francesco Garzarelli, Goldman Sachs’ co-head of global macro and markets research has downgraded her year end forecast for the 10’s to 2%. Last night US 10’s sold off to 1.43% – 11 basis points off last week’s all-time low. Garzarelli believes US inflation is heading higher and will push bond rate up. That will also keep the Fed in play. Both will be headwinds to the stock market rally.

4. Economists are getting worried about the Chinese Yuan’s continued fall. China is making a huge economic transition less than two decades since its economy exploded after it joined the World Trade Organisation in 2001. That’s remarkable in itself. But because China has grown to be the world’s second biggest economy the economic transition is under more scrutiny than the transition from investment to consumption that any Western economy had to endure.

So we really should cut the Chinese some slack. They are doing a pretty good job of the simultaneous reform and support of the economy that this transition requires. But many economists, traders, and especially hedge funds worry incessantly about China and its imminent demise which will bring down the walls of global finance.

As Linette Lopez reports the latest flash point that isn’t is the relatively benign slide in the value of the Chinese Yuan and the lack of impact this has had on capital flows or markets more broadly. Linette has taken on Soc Gen analyst Wei Yao’s jaundiced view of the potential impact of the Yaun’s fall. And they may be right. But for the moment China is acting as a dampener to global volatility in a way not many are giving them credit for.

5. The Yen has tumbled as traders bet on Abenomics Mark II. Even before Japanese prime minister Shinzo Abe first took office his plans to stimulate the economy caused a paradigm shift in the Yen and Nikkei. That then flowed onto other forex pairs and stocks. It happened again yesterday following a crushing victory for the ruling Liberal Democratic party in Upper house elections held over the weekend.

As Scutty reported the benchmark Nikkei 225 index finished the session up 3.98% at 15,708.82, recording its largest one-day percentage increase since March 2. The USDJPY rate also surged from a low of 100.42 yesterday morning it is at 102.80 – up 2.37%.

This is important for forex and stock traders and I like the way that Greg Anderson, global head of foreign exchange strategy at BMO Capital Markets in New York put it. Anderson told Reuters it looked “like part of what held the BOJ back several times earlier this year is it just didn’t make sense to expand (quantitative easing) if there’s no coordination with fiscal policy. But now there is.”

Yup. But can USDJPY really, and sustainably rise? That’s the big question.

6. There could be some upside from Brexit – inflation. I have to say, before the experience of the last few years I never thought I’d have cause to write a sentence like that one. But in a world bereft of inflation and the distortive impact that’s had on global central bank policy and interest rates, inflation would be welcome in much of the developed economic world.

So it’s interesting that FastFT reports this morning that not only have inflation expectations in the UK surged in the face of Sterling’s fall post Brexit but also that Deutsche Bank has hit a new high water mark, with a note saying that UK inflation will surge 5.2%. “Higher import prices should add nearly four per cent to CPI over three years, nearly half of that by 2017. The net effect should send inflation above three per cent. However, if sterling bears predicting another 10 per cent decline prove correct, inflation’s 25-year high of 5.2 per cent may be threatened,” Deutsche wrote.

Such calls complicate the Bank of England’s policy response to Brexit but it still seems likely they will ease policy. If not this week then at the next meeting when the dust is a little more settled.

One thing though. As we’ve seen in Australia the ability to pass on price rises depends on the strength of the underlying economy.

Key data for the past 24 hours (with thanks to BNZ markets)
NZ: Card spending retail (m/m%), Jun: 1.2 vs. 0.5 exp
AU: Home loans (m/m%), May: -1.0 vs. -2.0 exp.

You can catch me on Twitter or at AxiTrader where I am the Chief Market Strategist.

And now from CMC Markets’ Ric Spooner is today’s Stock of the Day

Primary Health Care (PRY: ASX)

Primary Health share price was a bit off colour yesterday. It closed down 1.3% on what was a very healthy day for the overall market.

Primary’s underperformance was caused by a profit downgrade and write offs of $98m. The write offs were housekeeping in nature and related to a miscellaneous bunch of assets including legacy IT systems and property associated with its medical centre business. The profit downgrade was mainly about costs associated with the asset revaluations. Primary now expects F16 profit to be $104m compared to previous guidance of $110-114m.

Like most healthcare companies, government policy represents a strategic risk for Primary whose core businesses are medical centres; pathology and diagnostic imaging. The election seems to have put attempts at health efficiency and cost savings on the ever growing list of taboo areas for politicians. Specifically the government’s plans to freeze the Medicare rebate to doctors out to 2020 and cut pathology payments look unlikely to see the light of day in this term. This will remove a couple of short term risk factors for Primary.

Chart wise, the 78.6% Fibonacci retracement around $3.44 looks a potential support level for Primary if downward pressure persists. The other possibility would be right down at around $3.07. That sees the support of a major channel pattern. However, a significant change in outlook either for the stock or the market generally would be required to get Primary’s price back to that support.

Ric Spooner, chief market analyst, CMC Markets. You can follow Ric on Twitter @ricspooner_CMC

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