Daily Market Reports | Apr 07 2017
By Greg Peel
The Dow closed up 13 points while the S&P rose 0.2% to 2357 and the Nasdaq gained 0.3%.
Under Pressure
It’s everywhere one looks or listens at present – talk from central bankers, politicians, commentators and experts of varying degree that Australia is experiencing a dangerous house price bubble, or at least Sydbourne is, and something has to be done about it. Even the ratings agencies have weighed in on it, not that they have any credibility.
APRA has indeed done something about it, by further tightening restrictions on investor lending, and time is needed to assess whether the most recent moves will have the desired impact. The RBA is happy with the measures, but still nervous overall. Politicians are simply doing what the focus groups suggest.
The risk is ever tighter restrictions will be placed on lending to the point upgraded capital risk weightings required against investor loan books will force Australia’s banks into another round of capital raisings. Over the last couple of years, the risk of more capital raisings has been centred on expectations of greater Basel IV “too big to fail” requirements topped by APRA’s “unquestionably strong” buffer which as yet remains undefined. But Basel negotiations have made little progress and APRA is also taking its time.
The pressure had eased in the meantime, with time being an important factor in the opportunity to organically build capital without the need to go to market, while the Trump rally and Australian banks’ opportunities for mortgage repricing have lifted earnings forecast and valuations. But now, the pressure is back on, specifically on the domestic side.
Financials led the ASX200 down yesterday with a -1.0% fall. Sector weakness continues to be further compounded by selling in Debbie-exposed insurers.
The resource sectors did not play the foil this time, with both materials and energy closing mildly in the red. The telcos were again hammered, down -1.3%. It would be misguided to call this sector “defensive” anymore. More defensive are healthcare (+0.7%) and utilities (+0.6%). Consumer discretionary (+0.5%) also had a good session despite Harvey Norman going ex.
But right now the focus is on the banks. Adding further to bank weakness is ongoing weakness in US bond yields. The US bank are closely correlated to US rates and Australian banks tend to follow US banks around unless a specific domestic issue interferes, such as mortgage repricing. Thus Australian banks also have a strong correlation to US rates and having hit 2.60% at the peak of Trump euphoria, the US ten-year yield is now back at 2.34% and falling.
Trump was elected at 2.27%.
Just Like Bogie and Becall
President Xi arrived in Florida a few hours ago but was not welcomed off the plane by President Trump, as is the typical protocol. Rather, Trump arrived a couple of hours ago, like the home side running on to the field last. The critical meetings with Xi are not being held in the more neutral White House but in Trump’s own, audacious, Florida estate.
The one-upmanship diplomacy is glaring.
And somewhat unsettling for Wall Street. While it is universally agreed the issues between China and the US are so many and varied there is no way they could all be addressed in one brief visit, markets are holding their breath to see how things might play out. But it was Trump’s earlier remarks that particularly unsettled Wall Street.
The US stock market was recovering from Wednesday night’s big Fed-related reversal last night during the morning, to the point at which the Dow was up almost a hundred points. But then came implications from Trump that in the case of Syria, in the wake of the gas attack, and in the case of North Korea, in the wake of missile tests, that he was prepared to act unilaterally if he had to.
Yet another stab at Xi before meetings begin, with regard China’s support for its rogue neighbour. And a stab at Syria’s main supporter, Russia. To make matters worse, Trump revealed last night that despite his change of heart on the Syria issue (Trump had previously criticised Obama for getting involved in the Syrian conflict), he had not yet actually spoken to President Putin.
Geopolitical tensions are rising, and on that note, Wall Street again turned tail last night, falling back to a more modest gain overall.
It was not necessarily a night to get too entrenched in the market anyway, given tonight’s jobs report. Wall Street will be closely watching that number, and nervously waiting for news out of Florida.
Commodities
I noted yesterday that LME trading had closed on Wednesday night prior to the turnaround on Wall Street, brought about by the release of the Fed minutes. Base metal prices were strong on Wednesday night but last night all prices fell, including copper down -1% and nickel and zinc down -1.5%.
Iron ore fell -US10c to US$80.90/t.
The oil market shook off the discrepancy between this week’s separate US inventory reports last night and instead focused on growing US refiner demand for crude ahead of the US summer driving season. West Texas crude is up US92c at US$51.74/bbl.
If this were twenty or more years ago the gold price would be soaring on heightened global tensions but it’s down -US$3.80 at US$1251.60/oz, with the US dollar index up 0.1% at 100.70.
The Aussie is down -0.4% at US$0.7542.
Today
The SPI Overnight closed up 16 points or 0.3%.
All focus tonight will be on US job and Florida.
Westfield ((WFD)) will hold its AGM today.
Rudi will connect with Sky Business via Skype this morning, probably around 11.15am, to discuss broker calls.
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