6 things Australian traders will be talking about this morning

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Brexit fears continued to weigh on markets over the weekend and during trade Monday.

US stocks have now fallen for the past three trading sessions and the S&P 500 is around 1.9% lower than last week’s highs.

That equity weakness, and the changed trader psyche more broadly, has seen the SPI 200 collapse from where the physical market finished the week Friday at 5312. With the SPI down at 5219 there is a real chance of a 100-point plus loss today.

Elsewhere bonds continue to rally – strangely even UK gilts – gold is higher as well, volatility in both British pound options and stock market more broadly is also up while oil is lower.

On forex markets the Japanese yen is stronger on safe haven flows while the Aussie dollar was knocked below 74 cents on Friday night but hung tough in trade Monday even though the Chinese data (item 6) was on balance weaker. Euro was a little stronger overnight and the pound recovered from a push to 1.4110/20 and is back 100 points higher this morning.

Here’s the scoreboard (7.46am):

  • Dow: 17732 -132 (-0.74%)
  • S&P 500: 2079 -17 (-0.81%)
  • SPI200 Futures (June): 5,219, -40 (-0.8%)
  • AUDUSD: 0.7383 -0.0046 (-0.62%)

Now, the Top Stories

1. Brexit fears materialised for traders over the weekend. I mentioned Friday that the moves in market on Thursday night looked very much like the realisation by traders that Brexit could be around the corner – or at least it had now come onto traders’ radars. Those moves really kicked off on Friday night and then again yesterday with the pound getting hammered, bonds continuing to rally, gold surging toward the $1300 mark once more and stocks under pressure.

The bookies still seem to think that the remain camp will eventually win. But the UK poll of polls at whatukthinks.org says the leave camp has a 4-point lead over the remain camp.

Source: http://whatukthinks.org/eu/opinion-polls/poll-of-polls/

It’s remarkable that markets have suddenly decided to be worried about Brexit, but that is the way things go. It’s not real until it’s close. There has been much scaremongering going on about the impact of a vote to leave on markets. No one really knows but one thing we do know is that uncertainty is poison and as a result, traders are moving money around to hedge their bets. That’s seen volatility spike to new all-time highs for the pound and it’s one of the reasons European stocks are under pressure as well.

Markets are on poll watch now. So volatility may remain high.

2. Worries about Brexit will see the ASX open sharply lower today. The physical ASX closed at 5312 on Friday. But with the June SPI 200 contract at 5217 this morning the likelihood is that the ASX is going to come under intense selling pressure when the market opens today.

We already know that the local market was struggling to hold above 5400 even before Brexit fears and we’ll see today prices move below what many thought was the bottom of the range at 5280. That, and the futures move puts the 61.8% support level I’ve mentioned many times at 5222 a key level chartists will be watching closely today. If it breaks, the focus for the technical traders will be on 5159 which is the next level of support.

Who wants to preempt the Brexit vote and catch the falling knife? Especially with the US markets closing under pressure.

3. Microsoft buys Linkedin – here’s why. Vision and execution. These two foundations on which any good business plan are built are the essential drivers of whether or not Microsoft’s $US26 billion spend to buy LinkedIn will work. The vision side of Satya Nadella’s decision to buy Microsoft is the easy part.

“Think about it: How people find jobs, build skills, sell, market and get work done and ultimately find success requires a connected professional world,” he said. “It requires a vibrant network that brings together a professional’s information in LinkedIn’s public network with the information in Office 365 and Dynamics.

“This combination will make it possible for new experiences such as a LinkedIn newsfeed that serves up articles based on the project you are working on and Office suggesting an expert to connect with via LinkedIn to help with a task you’re trying to complete.”

The question is then about how he integrates Microsoft’s products into LinkedIn in a way that doesn’t peeve LinkedIn users. That also assumes LinkedIn users are really engaged with the platform. That’s something the company’s last earnings report called into question.

But Matt Weinberger reckons that with LinkedIn and the Xbox, all of Microsoft’s wildest dreams are coming true.

4. ICYMI – Uber bear Albert Edwards has another dire warning. While we were enjoying the long weekend, Bob Bryan reported that Soc Gen’s Uber bear Albert Edwards thinks that the US economy is about to hit the rocks — hard. He reckons a recession is on the way again and still holds to his view that stocks will fall hard.

“Each successive recession (red part of real S&P top line) sees huge downturns, usually to new lower lows of both prices and valuations. That is why we reiterated our view early this year that in the coming recession the S&P will bottom at 550, a 75% decline from current levels,” Edwards said.

5. Here why low rates and central banking policy are harming the economy – savers can’t save. RBA governor Glenn Stevens has raised the question of the negative impacts of low rates on savers many times in the past couple of years. It’s a theme that Andrew Lapthorne, head of quantitative analysis at Societe Generale kind of picked up in a note to clients. Bob Bryan reports that Lapthorne looked at returns over the past 30 years and has essentially concluded that the amount of money that investors can expect to make from their nest egg has been deteriorating over the past 30 years, and the trend doesn’t look to improve.

As Bob says, this is a big deal for anyone who has a hope of retiring. Lower nominal returns means that people have to work longer or invest in riskier assets to generate the amount of cash needed to live through retirement.

That’s true. But the flip side of that is that whether in retirement or before, low rates can also change the consumption patterns and behaviour of folks who reduce current expenditure to save money either in or for retirement. It’s how we end up in a low growth world with a self-reinforcing lack of growth. This global experiment with super low rates and now negative rates misses the point that it sends the wrong signals to a large portion of the population.

6. Chinese data yesterday was a little disappointing. China released the usual monthly dump of retail sales, urban investment, and industrial production yesterday. Retail sales grew at 10% in the 12 months to the end of May which was a smidge lower than the 10.1% expected but still a very solid clip. Industrial production was up 6% against expectations of a 5.9% rise while urban investment rose by 9.6% in the five months to May. Well below the 10.5% expected.

Reuters reported that “investment by private firms slowed to a record low, with growth cooling to 3.9 percent from 5.2 percent in Jan-April and double-digits last year”. That means it’s falling to the government and the moribund SOEs to drive growth with the data showing that investment by state firms rose 23.3 per cent in the January to May period.

With everything else going on, not a lot of attention was being paid to this data on its own. But it’s another mild negative for traders.

Key data for the past 24 hours (with thanks to BNZ markets)
CH: Industrial production, y/y%, May: 6.0 vs. 6.0 exp.
CH: Retail sales, y/y%, May: 10.0 vs. 10.1 exp.
CH: Fixed asset investment, ytd y/y, May: 9.6 vs. 10.5 exp.

You can catch me on Twitter.

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

Blackmores (BKL: ASX)

Greg and I have featured this chart in 6 things a couple of times over recent weeks. However, I thought readers may be interested in a reminder today. The chart has arrived at much watched support levels, courtesy of a nasty 5.5% sell-off on Friday.

Blackmore’s was in the news on Friday with confirmation that it will be included in the ASX 100 index. Perhaps more relevant to Fridays’ selling, was news that a2 milk will also be included in 200 index. With both these stocks in the China food and healthcare space there may have been some selling of Blackmores to make room for A2 in institutional portfolios. Concerns about regulations on the import of infant formula into China are alos seen as a risk factor for this stock.

Blackmores is back to valuations of 24 times F16 earnings and 20 times F17. Not cheap, but getting much more reasonable than the multiples of 38 times being paid when the stock peaked at $220.90.

Despite the pull back in valuation, this Blackmores share price is hitting trend line support with strong downward momentum. A break below it would not surprise. If this happens, the next support zone around $131-133 may be of interest. This consists of the 61.8% Fibonacci retracement; previous lows and a harmonic AB=CD level.

Ric Spooner, chief market analyst, CMC Markets

You can follow Ric on Twitter @ricspooner_CMC

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