Daily Market Reports | Jul 05 2017
By Greg Peel
US markets were closed last night for the Independence Day holiday.
Mindless
The South Australian opposition has blocked the state bank levy, Wall Street provided a positive lead, local May retail sales surprised on the upside and the RBA neither raised the cash rate nor suggested it might anytime soon. These are all reasons why having been down a hundred points over the past two sessions, having been up strongly previously, the ASX200 turned and ran up a hundred points yesterday.
Wrong.
Of the three factors, only the bank levy can be pointed to as having any impact. Financials was the leading sector on the day with a 2.2% gain and is the biggest sector by market cap. The Big Four banks alone accounted for 33 index points.
The other three are fair calls, except for the fact the index was already up 80 points from the opening bell. The past month has seen heavy down-days locally when Wall Street has been positive. And while forex traders may have assumed the RBA would join the chorus of global central bank hawkishness, nobody else did. The retail sales result ensured consumer discretionary rose 1.9% yesterday, but every sector saw gains of 1-2%.
It’s been a rock and roll ride these past few sessions, and yet the market has still gone absolutely nowhere. The bottom is 5680 and the top is 5800. In between is a tennis court. One has to wonder just what impact momentum-based high frequency algorithms and the crowding of funds into ETFs is having on intraday volatility.
Retail sales rose 0.6% in May. Economists had forecast 0.2%. April’s result was also surprisingly strong but one month does not make a trend. Two months of strong sales now has economists scratching their heads. High levels of household indebtedness and anaemic wage growth are supposed to be putting a lid on discretionary spending – a point the RBA has warned about. But with sales growing 3.8% year on year in May, this seems not to be the case.
“Growth in housing debt has outpaced the slow growth in household incomes,” the RBA governor reiterated in his policy statement yesterday. Indeed, the bulk of his statement was pure reiteration of recent monthly statements. “Conditions in the housing market vary considerably around the country,” and “Indicators of the labour market remain mixed”.
All reasons why “the Board judged that holding the stance of monetary policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time”.
The ECB has again been trying to pour cold water on what Mario Draghi, supposedly unintentionally, started. This has done nothing to stem the tide of rising global bond yields. One minute the Bank of England governor is saying he won’t put rates up given Brexit uncertainty and the next minute he’s saying maybe a rate rise might be necessary soon.
If global bond yields do continue to rise, the Fed tightening program picks up pace, and the ECB begins to taper QE, the RBA will be under pressure to lift rates on global differentials. But that would only be to halt a major sell-off in the Aussie dollar which, while yesterday saw a -0.6% fall, is simply not happening. Indeed, “An appreciating exchange rate would complicate this adjustment,” Dr Lowe said yesterday, again, in reference to Australia’s transition away from mining investment.
The Aussie could fall well under US70c before the RBA became in any way concerned.
If global developed economies can “reflate” on stronger economic growth while Australia remains in accommodative mode, there’s no reason why the Australian market can’t ride on the coat tails, assuming China doesn’t fall over.
But what’s it going to be today? Up a hundred or down a hundred? Who’s got a coin? Likely we’ll do little for once.
Commodities
North Korea’s at it again, this time with an ICBM. Darwin school children are being taught how to shelter under their desks. Gold is up a whopping US$3.50 at US$1223.20/oz.
Nickel stocks have risen on the LME as Indonesia swings back into full export mode and signs of Philippines mining bans fade. Nickel fell -2% last night while lead fell -1.5%, having run up sharply in past sessions. Other metals were quiet.
Iron ore fell -US80c to US$62.00/t.
West Texas crude is steady at US$47.09/bbl.
The US dollar index is little changed at 96.25 but the Aussie is down -0.6% at US$0.7605, despite the strong retail sales result, because Philip Lowe did not change his tone.
Today
The SPI Overnight closed up 11 points or 0.2%. The futures have provided no accurate guide these past few sessions.
It’s services PMI day across the globe today while tonight sees the release of the minutes of the June Fed meeting.
My apologies to readers but I will not be publishing an Overnight Report tomorrow or Friday as I will be travelling to attend a family funeral. I will be back with the Monday Report next week.
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