– Now that Greece is settled, sort of, well not really, markets are free to contemplate what’s really happening around the globe and what’s likely to happen in the second half of the year. Front and centre in that thought process is — what will the Fed do? Comments from Federal Reserve governor Jerome Powell that he can see two hikes before year’s end weren’t missed by traders, who knocked US stocks off their early rally and drove the US dollar higher against the Euro. Powell is what’s considered a moderate and given his calls echo that of Janet Yellen’s replacement at the San Francisco Fed, John Williams, who is also calling two hikes this year, there is an air of market preparation in the remarks.
– Even the most casual of non-partisan analysis would find it hard to argue that the emergency measures put in place at the height of the GFC — including zero interest rates — are compatible with the current state of the US labour market and the diminishing threat of deflation. But the Fed is being cautious that it doesn’t repeat the taper tantrum. They are signalling a start of the rate hike cycle so as not to catch anyone unaware.
– But bond traders aren’t so keen on rising rates and the US 10 year Treasury was up again overnight to 2.41%. That’s just nine points below the nine month high of 2.503% hit earlier this month. German 10’s are at 0.81% and UK Gilts have climbed to 2.13%. Reuters reports Aussie 10’s are being dragged higher too and are set to open at 3.10%.
– Bonds are the clear and present danger to stocks. Bonds, or interest rates and credit products, are always the clearest and most present danger to stocks. Look at the GFC, LTCM crisis, etc. The key here is that rates are rising and as Wolf Richter wrote yesterday, investors are exiting high yield bond funds as defaults rise and risk weighs heavy. That is a sign in itself of stormy seas, let alone Fed hikes.
– Last night the wash up of the above was that US and European stock markets finished off their highs but still in the green. That helped local futures traders keep SPI 200 futures in the green with the September contract up a few points.
– On the data front last night durable goods orders fell 1.8% in May which was almost double the 1% fall that had been anticipated by forecasters. But if you take out aircraft orders the data is a much healthier increase of 0.5%. Home sales rose 2.2%, much stronger than the 1.2% expectation. In Europe the raft of “flash” PMI’s were solid.
Here’s the overnight scoreboard (7.17am AEST):
- Dow Jones up 0.13% to 18,144
- Nasdaq up 0.12% to 5,160
- S&P 500 up 0.06% to 2,124
- London (FTSE 100) up 0.13% to 6,834
- Frankfurt (DAX) up 0.72% to 11,542
- Paris (CAC) up 1.18% to 5,057
- Tokyo (Nikkei) up 1.87% to 20,809
- Shanghai (composite) up 2.16% to 4,575
- Hong Kong (Hang Seng) up 0.93% to 27,333
- ASX Futures overnight (SPI September) +1 point to 5624
- US 10 Year Bonds up 3 points to 2.41%
- German 10 Year Bonds down 1 point to 0.88%
- Australian 10 year bonds up 4 points to 3.10%
- AUDUSD: 0.7729
- EURUSD: 1.1159
- USDJPY: 123.92
- GBPUSD: 1.5726
- USDCAD: 1.2328
- Crude: $61.16
- Gold: $1,177
- Dalian Iron Ore (September): 436
– The local market had a really interesting day yesterday. The rally was solid after the strong lead from offshore. But it was more than double what futures suggested yesterday morning. Yesterday afternoon Chris Weston, IG’s chief market strategist, said:
“We were always going to take some positive flow from the Greek negotiations and the overnight leads, but if you look at the short-term trend from early June it seems the bulls have been in control of the moves. We just needed the macro backdrop to improve.”
It won’t go up everyday and today looks like heavy going for the index. But support has certainly been in evidence since the recent lows.
– In Asia yesterday it was an amazing days’s trade. The Nikkei surged 1.87% to another 15-year high. But it was Shanghai that had us all transfixed with some amazing volatility. The composite index opened around Friday’s close before plunging to a low of 4265. That’s a fall of 4.75%. It rallied a little just before lunch and then, once money flowed back to punters who missed IPO’s last week, the market surged to close up more than 2%. Is MSCI really thinking about putting Chinese stocks in a global index? :S
– On forex markets the “buy the rumour sell the fact” trade continued with the Euro, Yen and Sterling being crushed by the US dollar, buoyed by reasonable data and the Fed speak mentioned above. The Aussie and Canadian dollars have done so badly. In the case of the Aussie buyers keep popping out of the woodwork when it falls. The bulls would have loved RBA governor John Edwards upbeat tone concerning the economy yesterday, even if he did repeat the RBA mantra that the Aussie is still too high.
– On commodity markets the fear bid has collapsed in gold and it drifted back in the mid $1,170 region. The opposite is the case with Nymex crude which rallied hard. Ostensibly the rise is about inventory data to be released which is expected to show an increase in demand for oil.
– On the data front today the Chinese leading index of economic growth might be interesting in our timezone. Tonight German Ifo is out along with the latest read of US GDP for the first quarter. The market is expecting an increase from the previously reported -0.7% to a -0.2% pace. Personal consumption data is also out. And of course we still have Greece to watch.
And now from CMC Markets’ Ric Spooner is today’s Stock of the Day
There are not many opportunities to invest directly in Australian agriculture via the share market. TFS Corp is one. It’s an ASX 300 company that grows sandalwood trees in northern Australia. Sandalwood is used not only in perfumes and incense but also in pharmaceuticals with the main application being in the treatment of skin diseases. TFS recently took a further step towards vertical integration with the acquisition of US pharmaceutical companies that are well advanced in formulation and commercialisation of various dermatology products.
This week, TFS has bounced off the support the March and April lows as well as its 40 day moving average around $1.60. If you are of a mind to hang out hoping for better prices, another possibility from a chart point of view might be the 61.8% Fibonacci retracement of the last leg up around $1.50.
Ric Spooner, chief market analyst, CMC Markets
You can follow Ric on Twitter @ricspooner_CMC