Crude oil surged around 3.5% to $46.23 in WTI terms on an unexpected inventory draw overnight.
But that didn’t help stocks in the US which came under heavy selling pressure as traders worry about the state of the US growth after disappointing results from the retail sector. Having gained 222 points the previous night, the Dow gave back 217 in last night’s session.
Those fears, and a rally in US interest rates, hurt the US dollar which lost ground against the euro and yen in particular. The Aussie is largely unchanged from this time yesterday while the Canadian dollar benefited from the rally in crude.
The overall selling in stocks and the risk off fall helped gold rally back to $1277 but the ASX200 is expected to open lower with the June SPI200 futures contract off 33 points, around 0.6%.
Here’s the scoreboard (8.00am):
- Dow: 17,711, +217 (-1.21%)
- S&P 500: 2,064, -20 (-0.96)
- SPI200 Futures (June): 5,327, -33 (-0.6%)
- AUDUSD: 0.7373, -0.0000 (+0.0%)
Now, the Top Stories
NB: I have a big discussion on US retail and what it might, or might not, mean for the economy and Fed at item 6 because it’s a little long.
1. Crude oil rallied again – that could support some sectors on the ASX today. Stock volatility continues and the ASX is not immune from that. After trading above 5400 to a high of 5425 yesterday, the 200 index ended at 5372 – still a good day and a gain of 0.55%. But the overnight falls in US and European stocks has SPI futures suggesting a drop of around 0.6%.
But the rally in crude oil means that the weakness is likely to be far from universal today. Sure retailers will likely come under pressure after the weakness in the US but with gains of around 3.5% for Nymex WTI crude and 4% for Brent, Australia’s energy sector could be bid.
And crude might keep rallying if the chart Rob Rennie shared on Twitter is any guide. It suggests crude should see some inventory drawdowns in coming weeks and months which will help prices.
Right on cue, US crude inventory peaks and starts falling? Down 3.4mb for week of 6th May and further falls to come? pic.twitter.com/G9cMRLPfWo
— Robert Rennie (@R0bertRennie) May 11, 2016
2. Water, folks – BAML says that’s the next global economic crisis. While we worry about China, emerging markets, political instability in the Middle East, and the possibility of Brexit and a break up of the EU, there are bigger risks says Joe Quinlan, strategist at Bank of America Merrill Lynch’s US Trust.
Ben Moshinsky reports Quinlan says these are all “known unknowns” which is good because we know we need to watch them. But, he says, none of these “hazards just mentioned are as remotely as threatening to the global economy as water-related climate change risks, a dynamic little understood by investors.” I couldn’t agree more. You have to read Ben’s article covering Quinlan’s views.
3. China crisis – forestalled, but is it inevitable? Yesterday I wrote up a note from ratings agency Fitch which said that a Chinese hard landing is still the “key global risk”. While a crash is not their base case, Fitch is worried about imbalances and the risk of a yuan devaluation.
It’s a risk traders focused on with the selloff in early January and February around global markets. And it’s a risk that has largely moved into the background of traders’ minds because Chinese stimulus has seen Chinese data improve over the past couple of months.
But Jim Edwards points out that Credit Suisse analyst Andrew Garthwaite and his team say China’s private debt load has grown so large it is now second only to that of Ireland’s back in 2008. That’s a worry, Garthwaite says, because just like the Irish experience, China’s property market is a bubble. The article is definitely worth a look.
4. Two former US Treasury secretaries are also worried about China, while this hedge fund manager says the next president in the US will face a recession. There is another hedge fund conference in Las Vegas at the moment called SALT and Linette Lopez reports on a discussion between former US Treasury secretaries Robert Rubin and Larry Summers which was moderated by David Rubenstein, the co-CEO of Carlyle Group.
Asked what the “biggest risk to markets you see outside the US”, both men highlighted China. Rubin said privately Chinese economists are more candid about uncertainty while Summers sees a lot of risk.
Summers talked about political risk and the rise of populism – Summers is a Democrat – and the fact that it is leading to “huge instability”. Rubenstein himself weighed in with a prediction that “in the first term of the next president we will probably have something close to a recession or something that might be close to very low growth”.
5. Here’s another sign central bank policy has failed to work – Moody’s says normal interest rates are history. It won’t be news to regular readers of this note but Moody’s managing director Colin Ellis says the old yield curve – the one where savers could earn a decent quid and there was a cost for the risk of borrowing – isn’t coming back anytime soon.
Ben Moshinsky reports Ellis said that’s because, “over the past seven years, policy rates have been at low levels in most economies and central banks have dramatically expanded balance sheets. Despite this, there has been little sign of a genuine and pervasive increase in inflation.”
And we better get used to it because structurally lower rates and no traction from central bank policy is a demographic phenomenon that won’t be solved in the next 10 or 20 years.
At least it’s going to stay cheap to buy a house, car, credit card – no, wait – scratch that last one.
6. Is the problem with US retailers a sign of economic weakness or is Amazon just crushing everyone? On SkyBusiness this morning, traders in the US are increasingly concerned about the state of US growth because of what the retailer reports are suggesting. Macy’s and Fossil are the latest companies to miss on earnings and their stocks got crushed as a result. Myles Udland says retail stocks are trading as though the entire industry is going under.
Last November, Myles made a cogent argument for why the retail business is just brutal and traditional bricks and mortar firms are at risk from “upstart competitors”. That, as Bob Bryan explained overnight is why ratings agency Fitch says retail companies are struggling.
But while bricks and mortar retailers are getting hammered, Amazon is totally crushing its retail competitors. Eugene Kim highlights that while Macy’s guidance was that they were seeing lower “consumer spending levels for apparel and related categories”, the opposite is true at Amazon. Kim says that according to the financial services firm Cowen & Co., Amazon’s apparel and accessories business is one of its key growth categories and is forecast to see steady expansion.
So is the US economy weak or are we just seeing the results of disruption? It’s the most important question traders and the Fed need to answer in 2016.
Key data for the past 24 hours (with thanks to BNZ markets)
NZ: Financial Stability Report: no change, as expected
AU: Westpac consumer confid., May: 103.2 vs. 95.1 prev.
AU: Home Loans (m/m%), Mar: -0.9 vs. -1.5 exp.
UK: Industrial production (m/m%), Mar: 0.3 vs. 0.5 exp.
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And now from CMC Markets’ Ric Spooner is today’s Stock of the Day
The diversified building products and aluminium group’s full year profit was announced yesterday and beat expectations. Its underlying profit for the year to March was up a solid 13% at $142.3m.
Aluminium prices were better than expected and CSR announced that its Gove subsidiary has 50% of its sales hedged. A weaker $A will boost aluminium revenue.
The market is concerned about the possibility of a building down turn given the recent flattening in building approvals. However, CSR believes that the existing pipeline of residential construction will support record levels of activity for the next year anyway. Last week’s rate cut won’t do any harm either.
The trend line on CSR’s chart is operating as a clear point of control. After being broken in early April it is now acting as resistance. Yesterday’s spike higher again stopped neatly at this line. At this stage, potential buyers might wait for downward corrections off this line to create opportunities.
Ric Spooner, chief market analyst, CMC Markets
You can follow Ric on Twitter @ricspooner_CMC