Good morning. Here’s your essential Tuesday update.
– Each morning the main focus is on stocks and stock markets but as an old interest rate trader I guess bonds and cash rates are in my DNA. So it’s these markets I always look to for a lead on what is going on. Last night we saw a big sell-off in US Treasuries amid signs the US downturn through the northern winter is behind the economy. The rate on 10-year bonds finished at 2.53%, up 5 basis points. But while that’s only 5 basis points, that’s a loss of 2.15% in terms of capital price. Ouch.
– Key to the price action was the release of the Markit PMI in the US and it is worth quoting our colleagues at BI US who said this morning that “May manufacturing purchasing managers’ index (PMI) increased to a three-month high of 56.4 from 55.4 in April.” Markit’s Chris Williamson said “With the exception of a brief spell in early-2010, output is growing at the fastest rate seen since prior to the financial crisis. The household sector in particular is leading the upturn, with demand for consumer goods rising at the fastest rate for four years. This is therefore very much a domestic led upturn, but it is encouraging to also see that growth of export orders picked up in May, pointing to an improved trade balance in the second quarter.”
– That’s good news and when the ISM finally, on its third go, got its number correct with a print of 55.4, it was confirmation the economy is doing better than expected.
– But this didn’t help stocks because some notions that the Fed might “taper the taper” – as we saw in the press here today and which had been growing in the US – were put to bed. At the close, the Dow was 0.16% higher at 16,744, the Nasdaq was 0.13% lower and the S&P hardly budged, up 1 to 1,925.
– In Europe, the data almost guaranteed lower rates from the ECB, and even the follow-on step of quantitative easing with German CPI falling 0.1% in May on a harmonised print of -0.3%. Year-on-year headline inflation is now below 1% in Germany. Elsewhere, the Markit PMIs for Europe were on the weak side still and in most cases, weaker than expected, except in the UK which is doing better than its continental peers.
– At the close then, the Dax was 0.07% higher with a rally into the close, the CAC fell a similar amount, down 0.08% but also with a late rally. In Madrid and Milan, stocks were up 0.26% and 0.77% respectively. In London, things looked a little better with the rise in the iron ore price helping lift the miners. At the close, the FTSE was up 0.28% to 6,864.
– Locally, the ASX had a late rally yesterday buoyed by a recovery in miners, a Nikkei rally and a bit of M&A activity. Overnight ASX SPI 200 futures are up 6 points to 5,532 bid. On the bond boards, the 3s lost just a point to 97.22 bid (2.78%) while the 10s lost 2.5 points to 96.305 (3.695%).
– In Asia yesterday, the Nikkei ripped higher, rising more than 2% to 2.07%. Maybe someone knew there was a big USDJPY buy order coming because it surged last night to sit at 102.40 this morning. The Hang Seng rose 0.31% while shares in Shanghai fell 0.08%. Today we see the release of the Chinese non-manufacturing PMI and the latest read of May HSBC manufacturing PMI – both big numbers.
– On Currency markets, the US dollar was solid but euro didn’t fall as far as I would have thought, given the divergent data and ECB cuts that are coming down the pipe. Euro sits at 1.3596 this morning. Sterling is largely unchanged at 1.6746 while the Aussie was weighed down by the economic slowdown evident in the data yesterday and sits at 0.9247 this morning, waiting to see what the RBA does and says at 2.30pm today.
– On Commodity markets, Nymex June crude is at $102.45 Bbl, Gold is at $1,243 oz and Silver is at $18.67. Copper liked the US data, rising 4 cents to $3.18 lb while Corn had a strangely quiet night, closing largely unchanged. Wheat lost around three-quarters of a per cent while Soybeans rose 0.32%.
On the data front today, it is a huge day locally with retail sales for April and the RBA’s decision. We will all be poring over every word to get any hints of their thinking. The Chinese data is also important and then EU CPI tonight might – only might – move the euro. In the US tonight we get ISM New York, factory orders and vehicle sales.
Here is Ric Spooner, CMC MArkets Chief Market Analyst’s Stock to Watch.
While the rewards for successful development of large, cost competitive energy sources are great so are the risks. As Origin CEO Grant King neatly summarised when discussing yesterday’s announcement that it has bought into the Poseidon gas venture off the WA coast, “There are risks in action and risks in inaction”. Financial commentators are prone to criticising stocks like Woodside for perceived lack of growth opportunities while at the same time being nervous about those like Origin that make acquisitions.
The market reaction to Origin’s investment was negative. There is concern about pricing, risk and the equity raising that will be used to support the acquisition. If the project is successful, the chances are that the market won’t attribute much value to it until it has greater certainty about forward sales and the cost of development. This may take several years.
In the meantime the share price closed on its low yesterday and is testing short term trend line support. The stochastic oscillator is also starting to trend down out of the overbought zone. This suggests any further decline could set up for a break through the 40 week moving average and a test of medium term trend line support around $14.00.