– It’s all about bonds again this morning as the market rout continued. US 10’s sold off five points to close at 2.43% and leave traders with no doubt the post “taper tantrum” rally is finished. It’s also the highest yield in more than a year. German 10’s were up eight points to 0.96% while rates in the UK rose five points to 2.11%. That’s dragged Australian bonds sharply higher with the 10’s up 12 points to 3.09%.
– What’s happening in global bonds is a recognition that the time for the emergency measures from the depths of the GFC — six years ago now — are no longer the right settings for the United States. So it’s important, in that context, that overnight Westpac’s New Zealand based strategist Imre Speizer said “economic data in the US and Europe was supportive of higher yields”. Spiezer highlighted “US NFIB small business optimism improved from 96.9 to 98.3 in May. Intentions to hire rose from 11% to 12%, those expecting better economy improved from –6 % to –3% and firms expecting to increase worker pay held steady at an expansionary 14%. The May NFIB reading was the strongest for the year so far, and the second highest since early 2007, after December’s 2014’s 100.4.” Data in Europe showed Q1 GDP growth of 0.4% which was twice the expected level. Spiezer said the breakdown “showed accelerating growth in both household and business investment spending and government spending”.
– What’s also important for bonds, after the huge fall in inflation associated with crashing crude prices earlier this year, is that wages in the US and Europe are rising. That suggests to traders and economists the risk of deflation has passed, reinforcing the bond market sell-off. To prove the point, last night’s data showed German labour costs rose 3.2% year-on-year in Q1, up from 2.1% year-on-year in Q4, the fastest pace in two years.
– The wash-up was that most European stock markets fell while stocks in the US climbed off their lows to finish around flat on the day.
Here’s the overnight scoreboard (7.20am AEST):
- Dow Jones flat at 17,764
- Nasdaq down 0.15% to 5,013
- S&P 500 flat at 2,080
- London (FTSE 100) down 0.53% to 6,753
- Frankfurt (DAX) down 0.58% to 11,001
- Paris (CAC) down 0.15% to 4,850
- Tokyo (Nikkei) down 1.8% to 20,096
- Shanghai (composite) down 0.36% to 5,113
- Hong Kong (Hang Seng) down 1.2% 26,989
- ASX Futures Overnight (SPI June) -1 to 5,461
- US 10 Year Bonds +6 points to 2.44%
- German 10 Year Bonds +8 to 0.96%
- Australian 10 year bonds +12 to 3.09%%
- AUDUSD: 0.7685
- EURUSD: 1.1276
- USDJPY: 124.34
- GBPUSD: 1.5381
- USDCAD: 1.2326
- Crude: $60.52
- Gold: $1,176
- Dalian Iron Ore (September): 438
– Locally yesterday stocks on the ASX 200 were down again. That’s six sessions straight now and it’s the banks and miners under pressure again. That’s around 43% of the market cap of the index so it’s difficult for the overall market to rally against this backdrop. The next big support level on the market is the 5343 region which is the bottom of the uptrend from January 2012.
– In Asia yesterday Shanghai was down a little and there could be some disappointment today in that MSCI announced it will be including China A shares in its index, but just not yet, due to unresolved issues including market access. That sets up a very interesting day’s trade with a probable bearish bias given moves globally on stocks and the fact that market’s stellar rise has it in nose bleed territory. US Trust’s John Quinlan reckons it’s time to take some cash off the table in Chinese stocks.
– On forex markets it was a quiet and unremarkable night. It seems, for the moment, that competing forces and recent moves have the US dollar, and thus the pairs it trades against, at levels and in ranges where traders are waiting for the next piece of fresh news. So we wait. For Australia tomorrow’s unemployment is an obvious key event risk or trade opportunity.
– On commodities oil ripped higher overnight as traders bet that stockpiles in the US are being drawn down — we’ll know tonight. Nymex crude rallied 3.44% to $60.14. Crude is also in a range — just a big one. Gold is becalmed, copper rose a little to $2.73 a pound and Dalian iron ore is at 438.
– On the data front today the key local event is Westpac Consumer confidence and then a speech by RBA Governor Glenn Stevens at the Economic Society of Australia. It kicks off at 12:50pm (AEST). Tonight we get French IP, UK manufacturing production and in the US mortgage applications and crude stocks. We also get the UK GDP estimate.
And now from CMC Markets’ Ric Spooner is today’s Stock of the Day
Commonwealth Bank (CBA)
CBA’s shares are down 17.5% from their peak a little under 3 months ago. Rising bond yields have been one of the key drivers of the decline in “yield equities”. Bond yields were on the rise again last night in US markets.
One way to get some perspective on the size of the adjustment banks shares might make if interest rates “normalise” is to look at them in terms of price earnings multiples.
The chart below shows CBA as a multiple of estimated current earnings. It closed yesterday at 14.4 times earnings compared to an average of 14.9 times during the 2 years 2006-7. In this period Australian 10 year bonds averaged 5.8% compared to yesterday’s close of 2.96%. It’s arguable that with lower earnings growth, CBA should be at a lower multiple than in 2006. Markets also have a habit of over shooting to the downside. Even so PE values are approaching support in the range of 13.5/14 around 3-5% below current levels. Anything below this would be getting into the medium term decent value zone in my view even if prices temporarily fall further.
Ric Spooner, chief market analyst, CMC Markets
You can follow Ric on Twitter @ricspooner_CMC