– Bonds continued to sell off and the rout on the local share market yesterday looks set to extend today. The Dow and S&P fell after US Fed Chair Janet Yellen said stock valuations were quite high. There shouldn’t be any surprises when she raises rates later this year. But that recognition is seeing bonds quietly crash around the world. The uptick in US interest rates didn’t help the US dollar because European rates sold off again. This propelled the Euro to its highest level this year with an overnight high of 1.1370. That’s near enough to two big figures above yesterday’s low.
– The weakness in the US dollar also helped the Aussie dollar up above 80 cents again with a high of 0.8030 before US stocks reversed and the dollar recovered a little, forcing the Aussie back down into the mid 79 cent region. Likewise, US dollar weakness and a drawdown in crude stocks allowed Nymex crude to rally strong and hit traders technical targets before revising around $2 of its gains.
– Looking a bit closer at Janet Yellen’s remarks after giving what was ostensibly a very wonkish speech at the IMF about risk, financial institutions and society — a speech which was gold if you are into that sort of thing like I am — Yellen poured cold water on the global stock market rally :
I would highlight that equity-market valuations at this point generally are quite high. Now, they’re not so high when you compare the returns on equities to the returns on safe assets like bonds, which are also very low, but there are potential dangers there.
She also implicitly said that bonds are overvalued as well. There were reports she also said we could see a sharp jump in long term rates as the Fed begins to re-tighten monetary policy. Bond markets are a clear and present danger for global financial markets.
– On the data front over the past 24 hours there has been some pretty good news for the services economy around the globe. I say that because for most developed markets it’s services which easily dominate manufacturing, yet manufacturing PMI’s get all the coverage. The data really isn’t that terrible. It suggests the global economy may not be as weak as some think. It also suggests bonds may be right to be selling off in recognition of this and the change in the deflation outlook as energy prices have bounced from their lows. As a counterpoint, Imre Spiezer, Westpac’s NZ market strategist notes, “US ADP private payrolls grew just 169k in the April, a touch weaker than Westpac’s bottom of consensus 170k forecast. With March revised down by 6k to 175k, the latest gains are the first of <200k since January last year. This is further evidence that some underlying weakness in the economy/labour market is emerging, even if some of the factors holding down growth prove to be transitory. We stand by our bottom of consensus 180k April non-farm payrolls forecast (data due Friday)." Here’s the overnight scoreboard (7.15am AEST):
- Dow Jones down 0.48% to 17,841
- Nasdaq down 0.4% to 4,919
- S&P 500 down 0.45% to 2,080
- London (FTSE 100) up 0.09% to 6,933
- Frankfurt (DAX) up 0.2% to 11,350
- Paris (CAC) up 0.15% to 4,981
- Tokyo (Nikkei) closed
- Shanghai (composite) down 1.57% to 4,231
- Hong Kong (Hang Seng) down 0.41% to 27,640
- ASX Futures (SPI June) -26 to 5,630
- AUDUSD: 0.7973
- EURUSD: 1.1346
- USDJPY: 119.45
- GBPUSD: 1.5244
- USDCAD: 1.2036
- Crude: $60.60
- Gold: $1,191
– The ASX 200 came under heavy selling pressure yesterday once the bottom of this year’s trading range broke. The weakness in the CBA and other banks was a key driver of that move but technical traders would have been triggered short on the break, adding fuel to the fire. It’s about time people figured out Australian banks can’t keep expanding margins and paying huge dividends when their margins are being compressed. If you want to see how desperate they are to retain their elevated levels of profitability you only have to look at the fact they didn’t pass on the full 25 basis points rate cut. That’s regardless of the fact their borrowing costs — which was the GFC-induced reason for not passing on full rate cuts in the past — have reduced materially. This is double dipping writ large.
– In Asia yesterday, as I exited to head to the beach just after 4pm Sydney time, stocks in Shanghai were up 1.26%. But the composite index reversed the best part of 3% and finished down 1.57%. Once again this is a clear technical sign that the uptrend of the past few months has broken and further downside is likely in the days ahead. It makes sense, it’s come a long way.
– As highlighted above the US dollar came under pressure again. So much so that even with the real possibility of political gridlock or a minority government the Pound actually strengthened. But the big news is bonds are running again. German 10 years rose 7 points to 0.59%, Italian bonds rose 12 points and Spanish bonds were up 10 points. In the UK rates were up 1 point to 2% while US 10’s traded up to 2.25% before settling at 2.24%, up 5 points.
– On commodity markets, other than the oil move base metals were a little lower with copper settling at $2.93, gold drifting at $1,192 and while Dalian iron ore was up above 442 at one point yesterday it dipped a few points overnight to close at 437.
– Today the big data point for locals is the employment report for April. The market is expecting a small increase of 5,000 but there are plenty of calls for a drop in employment. The unemployment rate is expected to be 6.2%. The UK election (7:00am GMT) is the big event offshore but we’ll also get jobless claims in the US.
And now from CMC Markets’ Michael McCarthy is today’s Stock of the Day
CBA — on the nose
CBA delivered a stinker of a quarterly report yesterday. Yes, it was “solid” in absolute terms. The problem is it ripped apart the most compelling investment theme of the past four years – the dividend yield play.
Dividend yields between 8% and 12% tempted investors into shares over the last few years despite clearly flagged capital risks. The thinking is that longer term investors can ride out any sell offs as their capital is earning significant income. This approach makes sense where investors are never forced to sell and company earnings are not under threat. Declining earnings led to lower dividends, defying the logic of the dividend yield purchase.
Declining earnings caused by rising costs and contracting margins are bad news for any company. For a stock trading at lofty valuations, it’s lacerating, as evidenced by CBA’s 5.9% fall yesterday. This means CBA is down more than 14% from the high hit just six weeks ago. Where does the support kick in?
The weekly chart below shows the long term up trend support is sitting just below $80.00. At this share price, the estimated dividend yield (including franking) is around 7.6% – reasonably attractive in a 2% interest rate environment. The action at $80 will be illuminating, speaking directly to the health of both CBA and the dividend yield investment theme.
Michael McCarthy, chief market strategist, CMC Markets
You can follow Michael on Twitter @MMcCarthy_CMC
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