Daily Market Reports | Jul 19 2017
This story features BHP GROUP LIMITED.
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The company is included in ASX20, ASX50, ASX100, ASX200, ASX300 and ALL-ORDS
By Greg Peel
The Dow closed down -54 points or -0.3% while the S&P gained one point to 2460 as the Nasdaq rose 0.5%.
Aussie Aussie Aussie, OMG
“Members discussed the Bank’s work estimating the neutral real interest rate for Australia. The various estimates suggested that the rate had been broadly stable until around 2007, but had since fallen by around 150 basis points to around 1 per cent. This equated to a neutral nominal cash rate of around 3½ per cent, given that medium-term inflation expectations were well anchored around 2½ per cent, although there is significant uncertainty around this estimate.” [My emphasis]
It would appear the RBA didn’t really think it through before publishing this information, although minutes are minutes, one presumes, and all conversations are on the record. Perhaps the board never assumed the consequence would be a 1.5% jump in the Aussie dollar, and realistically what’s not said here with regard a cash rate of 3.5% , a mere eight rate hikes from here, is “in the longer term”, or perhaps “when Jupiter aligns with Mars”.
It’s too late now. Despite the caveat of “although there is significant uncertainty around this estimate,” the forex market took this paragraph as very hawkish, just at a time when the Fed is suggesting a “neutral” US cash rate is not much higher than the 1.25% rate currently in place, which is one tick below Australia’s 1.5%. And as is evident, the forex market was all lined up short at 78.
The Aussie is 1.5% higher over 24 hours at US$0.7915. It all happened on yesterday’s release of the RBA minutes, and later supported but not further fuelled by a -0.5% fall in the greenback overnight. The Aussie is now 10% above its May low and has added 5% since the RBA meeting earlier this month.
One only need look at the statement in the minutes from another angle – the neutral rate has fallen by around 150 basis points since 2007 – to arrive at a more dovish conclusion. But the local stock market was not stopping to discuss the nuances yesterday. It was just selling.
Higher rates (even though there is not a RBA hike on the horizon) are bad for yield-paying stocks, for consumer stocks and for housing-related stocks, for starters. Rising rates should be good for banks, but not in Australia where mortgages are priced off the cash rate. A strong currency is bad for offshore earners and bad for companies selling products priced in US dollars, most importantly the resource sectors.
Suffice to say all sectors were sold down yesterday by relatively even measures. And where did it get us? Yep, back at 5680 for the ASX200, give or take. We are yet to break out of the range.
Watch the banks today. They’ve been sold down this week ahead of this morning’s APRA announcement and I’ve just seen the breaking news of a 10.5% capital requirement by 2020. The majors are already at or near that level.
Oh How the Mighty
The trading desks of the big US investment banks all had a tough June quarter given a lack of volatility in equity, bond and commodity markets in isolation and a distinct drop in volatility compared to past quarters. While bank earnings results to date have been a tad on the disappointing side, weak trading profits have not surprised.
Until last night, when Goldman Sachs posted a shocker. The bank that runs the world clearly underperformed its peers, leading Wall Street to question, in the wake of a not so great March quarter as well, whether Goldman’s problems are not cyclical but structural.
Goldman shares fell -2.6%, which doesn’t sound like much until one considers the quirky nature of the Dow Jones average and the fact that by nominal share price, Goldman is the “biggest” stock in the average while not having the largest market cap. This means the -60 point drop in the Dow last night was -40 points Goldman Sachs.
The Dow had been down -150 points earlier on given the shock of it all and the bank sector in general had been sold, until it became apparent Goldman’s issues were more individual. The rest of the market recovered but Goldman didn’t.
On the other side of the coin, Netflix leapt 14% in the wake of its earnings result, posted after-market on Monday night, and provided another boost to FANG & Co. The pervading rotation trade on Wall Street of late has been to buy the Banks and sell Big Tech, or vice versa as was the case last night.
Meanwhile, another attempt at a healthcare reform bill has reached Congress DOA. The Senate leader then decided to try a bill that simply repeals Obamacare, as has been the Republicans’ pledge all along, despite having nothing to replace it with. Strangely, he couldn’t get the numbers for that one either.
US healthcare stocks have been trading up and down in a vacuum of uncertainty all year. But for the broader market, it does appear Trump has given up. Rather than having another shot at a Trumpcare solution everyone will like, he will wait and let Obamacare ultimately fail by its own hand, as he has suggested would happen anyway.
But does that mean it’s now on to tax reform? Perhaps. But then the repeal of Obamacare had been assumed a shoe-in at the time of inauguration. Tax reform to the extent Trump has touted is not set to sail through Congress without problems either.
Commodities
The US dollar index is down another -0.5% at 94.66. The bulk of of recent weakness is a reflection of relative European economic strength.
The weaker greenback is providing support for commodity prices, outside of individual demand-supply inputs. Base metal prices were for once all lined up in the green last night, but only on small moves.
Iron ore is up another US$1.30 at US$68.10/t.
West Texas crude is up US25c at US$46.25/bbl.
And, of course, gold is up, by US$8.30 at US$1242.00/oz.
Today
The SPI Overnight closed down -8 points, ahead of the APRA announcement.
BHP ((BHP)) releases its quarterly report today.
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