Daily Market Reports | Jul 02 2014
By Greg Peel
The Dow closed up 129 points or 0.8% while the S&P gained 0.7% to 1973 and the Nasdaq added 1.2%.
Once again one had to hold a magnifying glass to the RBA statement yesterday to determine if there were any changes at all from the month before. While Glenn Stevens has basically used the same template all year while leaving the cash rate unchanged, there were nevertheless two minor points to pick up on.
In June, the statement noted “In Australia, the economy grew at a below-trend pace in 2013 overall, but growth looks to have been somewhat firmer around the turn of the year”. Yesterday, with the March GDP result now a known result, the statement said “In Australia, recent data indicate somewhat firmer growth around the turn of the year,” but added at the end of this paragraph, “Overall, the Bank still expects growth to be a little below trend over the year ahead”.
In other words, the RBA does not expect as solid a GDP result in subsequent quarters as was booked in March. This has a lot to do with the currency. In June, the RBA noted “The exchange rate remains high by historical standards, particularly given the further decline in commodity prices”. Yesterday the statement said “The exchange rate remain high by historical standards, particularly given the decline in key [read: iron ore] commodity prices, and hence is offering less assistance than it might in achieving balanced growth in the economy”.
And on that note, the Aussie shot up. Well, actually that’s not true, it’s just the way the fools in the general media saw it. The Aussie didn’t budge on the afternoon RBA statement release, rather it shot up late morning on the China PMI releases, breaching a brick wall of technical resistance at 94.60, to be up 0.7% over 24 hours to US$0.9496. That breach gives the currency an open pass to make another run towards parity, as some economists are forecasting.
Beijing’s official June manufacturing PMI came in at 51.0, up from 50.8, and in line with expectations. HSBC’s alternative measure came in at 50.7, up from 49.4 but a tick off last week’s flash estimate of 50.8. The numbers did not surprise anyone, but confirmation that China’s manufacturing sector is now in expansion mode – on both measures – was enough to spark the charge in the Aussie. While yesterday’s RBA statement suggested no rate rise should be expected for some time, the forex market looks at an improving China and sees scope for a rate rise down the track.
Never mind that the victim of the stronger currency, as was noted by the RBA yesterday, is Australia’s domestic economy. Australia’s own June manufacturing PMI fell to 48.9 in June from 49.2 and has now been in contraction since about the time Brockie won his last Bathurst, or thereabouts.
Bridge Street pays a lot more attention to the Chinese PMIs than the local version, given relative GDP impact. I suggested yesterday morning we might see a reversal of Monday’s end-of-year sell-off during the session but it was not to be. What we saw was a switch. It looks like at least one big fund manager, if not many, declared FY15 to be the year to sell the banks and buy the cyclicals, or sell yield and buy growth, given the 20 point fall in the ASX 200 was all about a 1% fall in financials, countered by a 1% rise in industrials and a 0.5% rise in materials. The supermarkets also copped it, given a 0.6% fall in staples.
If readers refer to yesterday’s Equity Strategies For FY15, they’ll note more than one broker is recommending such a portfolio rearrangement in the first half. Interestingly, a lot of that recommendation is based on an expectation US bond yield will finally begin to rise this half, and hence the Aussie will finally fall as it should.
All evidence to the contrary so far, although the US ten-year bond yield did begin the new quarter with a bit of a rally last night, rising 5 basis points to 2.56%. At least it’s a start. The US stock market opened its account with another push to new highs.
At their closing levels, both the Dow and the S&P marked new all-time highs last night. It was not data-driven, given the US manufacturing PMI saw a fall to 55.3 from 55.4, although that’s still decent expansion. It was just an opening gambit, Fed-backed, and supported by expectations of 6-8% corporate earnings growth in the June quarter soon to be confirmed, potentially, when the quarterly reporting season begins in a couple of weeks.
The new high for the Dow was a near-run thing, given at lunchtime the average was actually up 172 points at 16,998. It looked 17,000 in the eye and then ran away to 16,956, just scraping over the previous high of 16,947. A new “millennial” milestone is only a psychological concept, but usually requires some work to achieve.
There nevertheless are few on Wall Street who don’t believe 17k will be in the bag sooner rather than later.
For the record, Japan’s PMI rose to 51.5 from 49.9, the eurozone saw a slip to 51.8 from 52.2 and the star performer – the UK – saw a rise to 57.5 from 57.0. One commentator called it “the greatest British output in a generation”.
The pound rose again on the news but is already pricing in the first BoE rate cut, so the US dollar index was steady at 79.81. Gold was also steady, at US$1325.70/oz.
The oils continued to drift off last night, despite an attempt in Iraq to form a new government to counter the rising ISIL onslaught ending in chaos, with many Sunni and Kurd representatives boycotting the session anyway. Brent slipped US25c to US$112.25/bbl and West Texas eased US10c to US$105.38/bbl just as motorists start to worry about the price at the pump this Fourth of July long weekend – a popular time to hit the roads.
The current US average price of “gas” is US$3.67 a gallon (about one Aussie dollar per litre) and US$4.00 is considered to be the price at which US consumers start to crimp their spending.
Base metals started strongly in London on positive global PMI numbers but were sold off in the afternoon, to be down slightly at the close. We recall they all had a good rally on the last day of June.
Iron ore rose US40c to US$94.20/t.
The SPI Overnight rose 18 points or 0.3%.
Will the switch continue on Bridge Street today? We have the May trade balance out this morning and tonight sees the US private sector jobs report, along with a speech from Janet Yellen.
Rudi will appear on Sky Business at 5.30pm.
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