6 things Australian traders will be talking about this morning

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Another strong night for risk assets and another new all-time high for the S&P 500 of 2155.40 before it closed at 2152 up 0.7%. The Dow and Nasdaq were up similar amounts while stocks in Europe rose more than double those amounts. Except for the FTSE in London which was marginally lower – perhaps distracted by BoE governor Mark Carney’s grilling before a parliamentary committee.

The wash up elsewhere from this risk rally is that the Aussie dollar is back above 76 cents, the Kiwi above 73 cents, gold has fallen to $1331, copper bounced 3% and crude rallied a very solid 4.5%.

That’s left the SPI 200 pointing to a 30-point gain when the ASX physical market opens at 10am this morning. Even with all this strength which should buoy the local market 5400 proved impenetrable yesterday and may again today (see items 3 and 4 below).

Here’s the scoreboard (7.49am):

  • Dow: 18347 +120 (+0.66%)
  • S&P 500: 2152 +30 (+0.7%)
  • SPI 200 Futures (September): 5,343, +30 (+0.6%)
  • AUDUSD: 0.7617 +0.0086 (+1.15%)

The top stories

1. Stocks are at record highs — here’s what one strategist thinks is going on, and what’s next. Alan Ruskin is Deutsche Bank’s global head of G10 FX strategy. As such he’s always in his helicopter surveying the global economic and market landscape. This vantage point gives him good vision of what is driving the current bull run in stocks. Akin Oyedele reports Ruskin says the cloud has lifted on six key concerns investors had about the global economy.

He’s identified the strong US jobs numbers, Brexit fears, Chinese Yuan devaluation, Italy’s banking crisis, Japanese fiscal policy and the lead Hillary Clinton has in the US presidential race as the key areas where the fog has lifted. But Ruskin also shines a light on traders current bout of cognitive dissonance.

“Something has to give — either the risk rally is hopelessly misplaced or Fed rate expectations are,” Ruskin said. Yup!

2. But Westpac’s Richard Franulovich explains how the risk rally might just keep running. Ruskin is right you can’t really have it both ways. If stocks are up because Brexit worries have receded and jobs are doing okay – amongst other things – then two of the big factors that kept the Fed on hold wash away.

But I covered a note yesterday in which Westpac’s New York-based currency strategist Richard Franulovich explained how “the combination of ‘reassuringly decent data’ and pro-growth monetary/fiscal signaling from global policymakers has been the key to steadier risk appetite”.

Franulovich said the data had been strong over the past few months but traders had been distracted by Brexit and are only just catching up with that again. That’s buoyed risk appetite, which in turn is driving the current risk rally. In contrast to Ruskin’s view, that the rally in stocks is incompatible with Fed expectations, Franulovich says, “the prospect of easier monetary from the BoE, a likely dovish lean form the ECB when they meet July 21, not to mention the renewed fiscal push in Japan all suggest global risk appetite should remain well supported in coming weeks”. Once this rally has run its course, then maybe Ruskin will be right.

3. The ASX is lagging and failed again at 5400 yesterday. If you think that the local stock market needs an RBA rate cut to break higher then maybe after yesterday’s release of the very strong NAB business survey you might feel a break of the recent high in the 5400/25 region is a bridge too far.

Certainly traders pulled the market up sharply yesterday just below 5400 with the high of 5392 giving way to an eventual close at 5353. That close, and the gain of just 0.3%, would have disappointed many and reinforced the massive overhead resistance. So the question for traders is whether the 33 point gain in the SPI suggests a run on the physical to 5383.

But unless, or until, the recent high breaks it seems the local market looks trapped. Even as the S&P 500 makes new highs. Here’s the ASX 200 chart from my Reuters Eikon terminal.

ASX200 Daily (Reuters Eikon)

4. Here’s JP Morgan’s giant guide to Australian and global markets. Paul Colgan put together this fantastic 26-page slide deck from David Kelly and the team at JP Morgan, along with their colleagues specialising in Australia’s markets and financial conditions. There isn’t much more you need to know about what’s going on. But here is my favourite chart. It shows why maybe the local stock market can’t kick on. PE’s folks, PE’s.

5. Here’s why we don’t have to worry about Italian banking – it’s Germany’s problem as well. There has been a bit of chat and growing concern about non-performing loans in the Italain banking system. The chances are high that the government of Italian prime minister Matteo Renzi might need to bail out Monte Paschi and the system. But I’ve noticed a subtle shift from Brussels as they suggest some government support might actually be okay – as long as creditors get some sort of haircut.

Why the change in rhetoric? I think this chart summarises the issue neatly. Where Monte Paschi’s share price goes so does Deutsche Bank’s own price. So the centre of the Maelstrom might be in Italy but it could engulf Germany’s flagship global bank. That means Wolfgang Schäuble and Jens Weidmann are as invested in Italian banking as Renzi. Here’s the chart of the movements in Monte Paschi and Deutsche Bank’s share prices from my Reuters Eikon.

Monte Paschi and Deutsche Bank Stock price daily (Reuters Eikon)

As an aside Marc Chandler, the global head of currency strategy at Brown Brothers Harriman, is also now worried about Portugal. But that will be Germany’s problem as well.

6. Ahem, Fed watchers. JPMorgan is giving 18,000 employees a raise because “wages for many Americans have gone nowhere for too long”. The US jobs market has been strong and wage pressure have started to rise. It’s one of the reasons the Fed has been on alert and many presidents and governor’s argued rates are too low. Friday’s strong jobs report was accompanied by strong wages growth for workers. The Fed will have noticed that.

And the Fed will have noticed that JPMorgan will give 18,000 US employees a raise over the next three years. Portia Crowe reports the firm is raising its minimum pay for American employees from $10.15 an hour to between $12.00 and $16.50 an hour, depending on market factors, CEO Jamie Dimon wrote in an op-ed in The New York Times Tuesday.

The Fed is unlikely to be as benign as many think over the next year if this, and the recent similar move by Starbucks, goes economy wide.

Key data for the past 24 hours (with thanks to BNZ markets)
AU: NAB business confidence, Jun: 6 vs. 3 prev.
US: NFIB small business optimism, Jun: 94.5 vs. 93.9 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

Alcoa (US)

As tradition demands, Alcoa kicked off the US reporting season last night and it surprised to the upside. Underlying earnings were 15c per share.

The business which pleased most was Alcoa’s “old fashioned” mining and smelting assets. Years of depressed prices courtesy of Chinese over supply, have forced this business to maximise efficiencies. With alumina prices expected to rise further this year, this is proving to be a happy combination. This is a positive for Alcoa’s Aussie joint venture partner Alumina Ltd. However, Alumina remains unhappy about Alcoa’s plans to spin off these assets and is blocking attempts to do so.

Alcoa’s chart looks to be in the process of forming a large basing pattern. A break through the resistance line below $12 would be even more constructive.

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

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