6 things Australian traders will be talking about this morning

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Crude oil surged again overnight up another 3% as traders bet that OPEC will be able to engineer a global production cap. That helped stocks rally in the US and Europe with the Dow up 0.94% and the S&P was also up a little less than 1% to 2061.

That sets up another good day for the local stock market today after the NAB business survey really helped sentiment yesterday. Overnight the SPI 200 June contract rose 38 points, 0.8% for a gain of 0.8%. Add in the solid gains on global banks – Citibank rose 1.9%, Wells Fargo was 1.6% higher while RBS rocketed 2.3% higher.

So it could be a great day for local stock market bulls.

It has certainly been a good day for the Aussie dollar bulls who also benefited from the NAB survey, and the overnight commodity rally. It’s at 0.7679 this morning. Elsewhere in forex, the yen has stabilised, euro is still around 1.14 but sterling is ripping higher along with the Kiwi and the CAD.

The crude oil rally of 3% also helped other commodities soar with copper up 2.65% to $2.15 a pound, while iron ore rallied 2.32% in New York futures trade. Gold is still strong around $1254/55.

Traders will be watching the release of the Westpac Melbourne Institute Consumer Confidence report this morning to see if it concurs with recent weakness in the ANZ series.

Here’s the scoreboard (7.04am):

  • Dow: 17,721, +164 (+0.94%%)
  • S&P 500: 2,061, +20 (+0.94%)
  • SPI200 Futures (June): 4,992, +38 (0.97%)
  • AUDUSD: 0.7683, 0.0090 (+1.05%)

Now, the Top Stories

1. The Aussie dollar is back near 77 cents after commodities rallied and the NAB Business survey reduced the risk of an RBA easing. A perfect storm might be engulfing the Australia dollar again after the confluence of downgraded global growth forecasts, a rally in commodities and a super strong NAB business survey all highlighted again that Australia, its growth, interest rates and AAA rating make it a standout choice for global investors looking for a port in the looming global economic storm.

That won’t please the RBA worried that a higher Australian dollar “complicates” the economic recovery and transition. But in no small part the signs of strength in the NAB business survey will go some way to mitigating those concerns – at least at the current levels of the exchange rate. Indeed, the NAB said yesterday “the latest Survey provides strong evidence that the Australian business environment has not only weathered global uncertainties, but appears to have strengthened. There are also signs that the non-mining recovery is becoming a little more broad-based”.

Obviously the RBA has told the market that a higher Aussie opens the door to a RBA rate cut. But remember the governor’s statement also said the preconditions for another rate cut – like the high Aussie and low inflation – only “provide scope for easier policy, should that be appropriate to lend support to demand“. My bolding is now the key phrase. If demand doesn’t need support then maybe the Aussie could rocket toward 80 cents.

2. You just have to read the Mohamed El-Erian interview. BI UK’s Ben Moshinsky had a chat with Allianz adviser and former PIMCO MD Mohamed El-Erian in what is a wide-ranging and extremely insightful interview. In it El-Erian neatly summarises some of the big issues facing the global economy, markets, and policy makers. He explains why Donald Trump and Brexit are in the ascendancy, how central banks dragging growth forward from futures impacts on your investment strategy, why diversification doesn’t work, and he also makes a point that could explain why Australia’s transition from the mining investment boom might be built on sand.

I’ll write more about that last point later today. But you just have to read the interview, it’s so rich.

3. The IMF has cut its global forecast again – and says the risks are skewed to the downside. “Global growth continues, but at an increasingly disappointing pace that leaves the world economy more exposed to negative risks. Growth has been too slow for too long,” wrote IMF chief economist Maurice Obstfeld in a blog accompanying the release of the IMF’s latest World Economic Outlook. He said the IMF’s projections show a “slight acceleration in global growth this year, from 3.1 to 3.2 percent, followed by 3.5 percent growth in 2017”. But both those forecasts are down from the IMF’s last WEO and Obstfeld says “our projections, however, continue to be progressively less optimistic over time”.

Will Martin reports that the IMF also cited the “return of financial turmoil itself, impairing confidence and demand in a self-confirming negative feedback loop” as a big risk to the global economy.

In his blog Obstfeld highlighted that the market turmoil does have some fundamental basis (my emphasis):

Since last summer, we have seen two distinct rounds of global financial turbulence. They featured abrupt sell-offs of risky assets, heightened risk aversion, spikes in emerging-market sovereign spreads, and sharp falls in prices of oil and other commodities. Markets largely recovered both times, but investors have arguably reacted more than changing fundamentals would have warranted, both on the downswing and the upswing. There is a risk that further bouts of volatility feed through to the broader economy.

But continued lower growth is in itself a risk. Obstfeld said “lower growth means less room for error”. Plenty of room, as the chart below suggests:

On Australian growth, the IMF said: “In Australia, growth is expected to remain below potential at 2.5 percent in 2016 but to rise above potential to 3 percent over the next two years, supported in part by a more competitive currency.”

4. More on the corporate debt crisis that’s coming around the bend – real fast. Earlier this week I highlighted a note from Deutsche Bank that said investors are right to worry about debt but they were just a year early with their fears. Overnight, Bob Bryan has picked up a note by Andrew Lapthorne, head of quantitative analysis at Societe Generale, who says the amount of debt that businesses have accumulated over the last 5 to 6 years has put them on the verge of a serious crisis.

“This level of borrowing in some sectors of the economy is now booming (with the risk of spinning out of control) to such an extent that we think that the build-up of debt on US non-financial corporate balance sheets represents one of the largest mispriced risks in terms of future market stability, downside risk and future economic growth,” Lapthorne wrote in a note to clients Tuesday.

Credit, debt, always blows up markets if it blows up. So traders need to keep an eye on this. Particularly because low growth is a great precondition for firm not being able to service that debt… even at super low rates.

5. Oil is surging before the big OPEC meeting as Russia says forget about Iran. Remember when everyone laughed at Andrew Forrest when he raised the idea of production caps on iron ore? Remember how many said you’re not allowed to do that kind of thing? Well, free marketers, it’s looking like OPEC might be about to cobble together a deal to do just that. Overnight we heard from two big players that such a deal might just get done. The head of Iraq’s state oil selling company says a production freeze is the only way to fix prices while the head of Russia state oil company Igor Sechin said prices are going higher. He also said a deal could be done even without Iran.

Now of course, the Saudis might yet scotch a deal given their antipathy with Tehran. But traders are buying the rumour with Nymex crude (West Texas Intermediate) up 3.99% to $41.97 this morning. That means oil has done something remarkable, something it hasn’t been able to do since July 2014 – it’s broken its 200-day moving average. That’s bullish and for many traders will change the way they view this market.

WTI Daily (MT4, AxiTrader)

6. Buy gold??? If there is one thing that has characterised 2016’s price action in markets it is volatility. And as the IMF WEO points out, economic uncertainty and financial market volatility look set to continue. Add in negative interest rates – which themselves make holding gold look cheap – and you get a recipe for a rally in the price of gold. That’s what we have seen so far this year as gold has rallied almost $200 an ounce from last December’s lows. But the rally isn’t over yet, according to the technical analysts at HSBC who say gold is on its way to $1500.

It looks like a good trade too. Stop lows $1200, initial target $1500. Bob Bryan has more here.

Key data for the past 24 hours (with thanks to BNZ markets)
AU: NAB business conditions, Mar: 12 vs. 8 prev.
AU: NAB business confidence, Mar: 6 vs. 3 prev.
CH: CPI (y/y, %), Mar: 2.3 vs. 2.4 exp.
GE: CPI (y/y, %), Mar F: 0.3 vs. 0.3 exp.
UK: CPI (y/y, %), Mar: 0.5 vs. 0.4 exp.

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