Daily Market Reports | Jun 30 2017
By Greg Peel
The Dow closed down -167 points or -0.8% while the S&P fell -0.9% to 2419 and the Nasdaq dropped -1.4%.
Send in the Mannequins
Is it the “global reflation trade”, or was it just window-dressing yesterday on the ASX? If we consider that four of the top five worst ASX200 performers yesterday were there simply because they went ex, and as they were mostly property names the REIT sector fell -1.2%, we can imagine what the day’s result would have been after adding back the dividends.
But the futures are down -67 points this morning.
If that proves accurate, then the window-dressers have gone a day early. If, however, we can point to the global reflation trade – rising global interest rates, largely triggered by comments the ECB tried hard to withdraw – then why are the futures down -67 points? Nothing changed overnight, and indeed the US ten-year yield is up another five basis points.
Not all sectors joined in the surge yesterday. Buying was concentrated in big caps, being the banks (+1.6%), the miners (+2.2%), energy (+1.9%) and healthcare (+1.0%).
Industrials closed flat, also hit by ex-divs, and utilities was the worst performer with a -0.2% fall.
The banks had an excuse to rally given rallies in US banks, based on rising rates and capital management announcements post stress tests. The resources stocks had an excuse in stronger commodities prices.
US banks are up again overnight as are commodity prices. Yet the futures are down -67 points. It was also individual stock option expiry day yesterday and the last time we saw this sort of volatility, albeit in the other direction, was on futures and index option expiry day two weeks ago.
In other words, I suggest we can’t really read much into this week’s market shenanigans. We’ll see how today plays out, with Wall Street’s reversal (but not for banks and energy) clearly impacting on SPI trader sentiment. After yesterday’s close, commentators suggested the breach of the 5800 mark will have chartists calling 6000 yet again. What will they call this evening?
Rotation
The Fed is now well into its tightening cycle. Global bond markets have ignored attempts by the ECB to play down Mario Draghi’s hint earlier in the week that tightening is nigh (QE tapering). The Bank of England would have raised by now if it were not for Brexit uncertainty.
All this points to an improving global economy, a “reflation trade”. It’s a double-edged sword for equity markets, given a strong economy is a positive but a rising cost of funds is a drag.
For most of 2017, once Trump euphoria began to wane, the worst performing sectors on Wall Street were financials and energy. The best performers were technology, healthcare and consumer staples. On Wall Street last night the only two sectors to finish in the green were financials and energy. And they posted solid moves, not just slight gains against the tide.
Everything else was sold off, hence the big fall in the Dow. Although it could have been worse – the Dow was down over -250 points at its nadir. Hardest hit was Big Tech, yet again, as is evidenced by the Nasdaq, with the S&P splitting the difference. It seems the Big Tech sell-off, from elevated valuations, has again posted a mere one session hiatus.
We should also recognise that while it is not EOFY in the US, it is the end of the quarter, hence there could be some shenanigans going on as well. But the rotation trade is a reflection of some nervousness and perhaps confusion as to how to play a rising rate environment after so many years of central bank ultra-accommodation.
Indeed, you could have been working in financial markets for over eight years now and never known anything else.
The biggest threat to global inflation, which remains below targets, is the oil price. Recent trading appears to suggest we are not going back down to US$35/bbl, but rather US$45/bbl is about the neutral point on the cost curve, either side of which production, particularly US shale production, will be boosted or cut back. If this is the case, an improving global economy should ultimately lead to higher inflation.
It is constantly being pointed out that Wall Street is overdue a correction, meaning -10%. But it’s been overdue for a couple of years now. We also know that there still remains a lot of the famed “cash on the sidelines”, and we can be pretty safe in saying the 30-year global bond rally is now over. That money has to go somewhere. That is why the TINA concept is cited by many as a reason stock markets will keep going up. There is no alternative.
And reason why we may not see a -10% correction anytime soon. Even -5% might be a stretch. Barring anything unforeseen.
In Australia, investment in property appears to have reached its peak.
Commodities
Aluminium, copper, lead and zinc were all up around 1% in London.
Iron ore rose US$1.40 to US$62.90/t.
The US dollar index is down another -0.5%, largely on euro strength, and despite a 5 basis point gain in the US ten-year yield to 2.27%. The weaker dollar is providing support for “real” commodities but not for gold, given rising rates. It’s down US$3.40 at US$1245.40/oz.
West Texas crude is little changed at US$44.87/bbl.
The Aussie is up 0.6% at US$0.7683.
Today
The SPI Overnight closed down -67 points. Yet US banks were strong again, commodity prices are up, just as they were yesterday. EOFY is here. Let’s face it, anything could happen today.
Locally, private sector credit data are due.
The US will see personal income & spending, including the Fed’s preferred PCE measure of inflation.
Rudi will connect with Sky Business this morning via Skype to discuss broker calls, probably around 11.15am.
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