Daily Market Reports | Jun 01 2016
By Greg Peel
The Dow closed down 86 points or 0.5% while the S&P fell 0.1% as the Nasdaq rose 0.3%.
Good News is Bad News?
We saw another questionable open on the ASX yesterday, in which the index plunged 43 points on the opening rotation with no lead-in from offshore whatsoever, following a flat session on Monday. As soon as the market was “open”, the index recovered virtually all of the ground the computers had lost.
Presumably the humans have learned to simply stand aside, let the computers run riot in the first half hour.
With normal programming re-established, all eyes were on the release of the March quarter current account data.
The current account and trade deficits both narrowed more than expected, which in short is good news for those who listen anxiously to politicians’ warnings over Australia’s debt. Importantly, the loss in export dollars experienced in the quarter due to plunging commodity prices was offset by the increase in volumes exported.
Export volumes rose 4.4%, underpinned by strong contributions from resources (5.6%) and services (6.1%). Export prices fell 5.0% and are down 11.3% year on year. The net result is a 0.7% fall in the value of exports.
On the other side of the ledger, the volume of imports fell 0.8%, led by a 7.0% fall in mining equipment. Import prices were 3.1% lower, and thus the value of imports 3.8% lower.
Put the two together, and the terms of trade will add 1.1 percentage points to March quarter GDP – a figure ANZ’s economists described as “very solid” and CBA’s as “whopping”. Economists have scrambled to lift their GDP forecasts from a prior 2.8% annual to as much as 3.2%.
But what does this mean for RBA rate cut expectations? Perhaps a clue lies in the fact yesterday saw the banks fall 0.5%, the telcos 1.2% and consumer staples 1.4%. Aside from a 1.5% fall in energy due to the lower oil price, these three yield-paying sectors led the index down. We should acknowledge there was also a pay dispute issue impacting Wesfarmers, and that utilities only fell slightly.
It’s not cut and dried, but the bottom line is if the March quarter GDP suggests the Australian economy is actually healthier than even the RBA had assumed, then economists might start to back away from their 1.00% cash rate forecasts.
And just to add fuel to that fire, yesterday’s data releases for the month of April showed a big rise in business borrowing – a positive indication for Australia’s economic “transition” – and an increase in building approvals when economists had forecast a fall following March’s strong result.
It would seem rumours of the housing boom’s demise are premature.
Yesterday it appeared the local market was trading off a theme so pervasive in US markets for so many years: With regard monetary policy, good news is bad news.
Sell in May? The ASX200 rose from 5250 to 5400 over the month. It would be of no surprise if yesterday simply saw some end of month squaring.
Flat in May
The same is likely true on Wall Street last night, albeit the Dow closed May only a handful of points higher for the month. Last night’s session was further complicated by stage 2 of the introduction of US-listed Chinese stocks into the various MSCI global indices.
Many an index-tracking fund benchmarks off the MSCI indices, and if new stocks are added, others must be sold to match new index weightings. The net impact should be a net offset, but if US stocks have to be sold, that impacts on US indices.
Last night’s data showed US consumer spending jumped in April by a better than expected 1.0% — the biggest monthly gain in seven years. Incomes rose 0.4%. The personal income & expenditure (PCE) measure of inflation rose to 1.1% annual from 0.8% in March in core terms. This is the Fed’s preferred indicator.
Nothing to stop a June rate rise there, although Wall Street continues to favour a post-Brexit vote July hike. Having at one point priced in little chance of a rate hike in 2016, the market now sees July as about a 66% chance to June’s 33%.
Last night also saw oil continue to drift back, having failed to penetrate the 50 level.
Commodities
West Texas crude is down US79c or 1.6% at US$48.83/bbl.
Also failing at the 50 mark is iron ore, which fell US70c to US$49.60/t.
It was a quiet return to trading on the LME. Zinc jumped 1.5% but moves in all other metals were negligible.
Gold found a bit of a bid last night nevertheless, having fallen steadily of late on the stronger greenback. The US dollar index is up 0.2% at 95.86 but gold is up US$10.10 at US$1215.00/oz, possibly also reflecting the end of the month.
On the strong current account numbers, the Aussie is up 0.7% at US$0.7231.
Today
The SPI Overnight closed down 24 points or 0.5%.
While Sell in May might have been quashed for another year, June is a month downunder which can often be impacted by tax-related selling of underperforming stocks ahead of EOFY.
Australia’s March quarter GDP result is out this morning.
And being the first of the month, it means PMIs. Most importantly, we’ll see May manufacturing PMI numbers for China from both Beijing and Caixin, along with Beijing’s service sector PMI.
The Fed will release its Beige Book tonight, but the focus will be on the ADP private sector jobs number for May, ahead of Friday’s non-farm payrolls release. There is a complication this month given 35,000 workers at Verizon were on strike over the survey period and will thus be counted as “unemployed”, even though they’re now back. So there may need to be some averaging between the May and June numbers, albeit the Fed meets in between.
Rudi will host Your Money, Your Call Equities tonight on Sky Business, 8-9.30pm.
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