By Greg Peel

The Dow closed down 34 points or 0.2% while the S&P lost 0.2% to 2071 and the Nasdaq lost 0.2%.

More of the Same

The change of mood was still evident yesterday morning in the wake of Tuesday’s hundred point capitulation as the index opened lower once more. Last week Brexit was a date on the calendar, this week it’s a looming potential catastrophe.

The market did nevertheless decide mid-morning that perhaps enough is enough. Brexit is by no means a given at this stage, and if the result is to stay, one presumes an almighty rebound. If it is to go, well a lot of that risk has already been priced in.

But after managing to hold its ground into the afternoon, the index conceded to selling late in the session to ensure the market closed on its lows. That selling may not, however, be specifically Brexit related. Today sees the expiry of June quarter ASX index options, SPI futures and futures options. If investors are rolling over protection, as is sensible to do before the potentially volatile expiry day, protection sellers are selling stocks to hedge.

The same thing happened on Wall Street last night. More on that in a moment.

While all sectors again finished in the red yesterday, this times the banks (-1.4%) were a particular stand-out. The biggest impact of a Brexit will be felt by the global banking industry, as reflected in the ongoing shift down in global interest rates.

Materials also fell 1.4% on the lower iron ore price and on hedge selling of large caps, which also ensured telcos were down another 1.1%, Thereafter, the magnitude of sector drops tailed off.

As was the case with Tuesday’s NAB business confidence survey, yesterday’s Westpac consumer confidence survey was never going to have much of an impact on a market worried about other things. As it was, it was a pretty solid result.

The confidence index fell 1.0% in June to 102.2. But given it jumped 8.5% in May following the RBA rate cut, economists suggest that to only slip back a percent is a sign of lingering confidence. And numbers over a hundred represent optimism. It’s also not a bad result given election uncertainty. The result pre-dates the sudden rearing of Brexit’s ugly head, but one wonders just how long the average consumer lays awake at night worrying about such matters.

Loss of Credibility

Before last night’s Fed statement release and Janet Yellen’s press conference in the afternoon, there were a couple of significant data releases in the morning.

The US producer price index rose 0.4% in May, beating 0.3% expectations, but it was all about oil prices. Take out oil and food, and the core PPI actually fell 0.1%. Nothing to suggest a rush to hike rates there.

Industrial production fell 0.4% to market the seventh decline in nine months. See above.

Yet according to the afternoon’s Fed statement, and despite a very low March quarter GDP result, the US economy is actually looking better now than it was in April when the last FOMC meeting was held. Back in April, it was the strong US labour market that was driving Fed thinking, and expectation of rising inflation. But now, the Fed sees the labour market slowing.

One bad apple don’t spoil the whole bunch girl. Maybe Donny Osmond should be Fed chairman. The Fed may be data dependent, but the FOMC will be a bit red-faced if the weak May jobs number does prove to be a one-off as many expect.

Whatever the case, the FOMC chose not to raise its cash rate last night. It was a unanimous decision, meaning prior hawks on the committee have now pulled their heads in. More importantly, the infamous “dot plots” showed the FOMC members have all reduced their rate expectations through to 2018. The Brexit vote may have held the Fed up this month, but it would seem a July hike just flew out the window.

Indeed, it appears the Fed may now only be looking at one rate hike this year, down from four after hiking in December. The market thinks even one is becoming unlikely. What has everyone frustrated is that in April the Fed suddenly swung to be quite hawkish, leading markets to prepare for a June rate hike that seemed inevitable. Then came one bad jobs number. Now the Fed is back to being dovish again.

The market had always been dovish. The Fed has come back to meet the market. Who is influencing who?

There is also general feeling, Brexit fears aside, that the Fed simply cannot risk a rate hike when Japan is negative, half of Europe is negative and Germany is on the cusp of negative. The gap may be too much for global markets to handle. Not that global markets are supposed to be the US Federal Reserve’s responsibility.

The fact that the Fed has come back to meet the market was reflected in stock index movements over the session. Indices were a little higher in the morning thanks to rebounds in Europe, and typically quiet ahead of the statement release. On the statement release they did very little at all, which is most unusual. The Dow sat at around 50 points up all through Yellen’s press conference and beyond.

The fact the Dow closed down 34 points, representing a sharp late sell-off, has been attributed to Friday night’s “quadruple witching” equity derivatives expiry – the equivalent of what the Australian market will see today only of a much greater magnitude. The June quarter always represents the biggest expiry volumes, and typically the market starts to roll over positions a couple of days ahead. With protection still being sought at this time of uncertainty, rollovers translate into stock selling.

Commodities

West Texas crude is down another US41c at US$47.49/bbl.

Whatever’s going on in base metals at present, no one’s quite sure. The LME always closes just as the Fed statement is being released, which usually means little movement until the night after. But last night copper jumped 2.7%, following a couple of weak sessions. Aluminium rose 0.5% and nickel and zinc both around 1%, while lead stood still. Short covering was cited.

Iron ore fell US60c to US$50.20/t.

The US dollar index is down 0.4% to 94.59, but that’s all post-Fed. Gold is up US$6.00 at US$1291.50/oz, having briefly kissed 1300 post-Fed.

The Aussie is up 0.8% at US$0.7408 but that is not a Fed-related spike. The Aussie has steadily been climbing over the past 24 hours, possibly as the world comes to realise Australia’s is one of the few developed economies left offering reasonably positive rates. Even at 1.75%.

Today

The SPI Overnight closed up one point. Have we seen the end of the pre-Brexit vote selling? Today, as noted, is expiry day, so anything might happen.

And to that end we note the Bank of Japan will hold a policy meeting today, no doubt very relieved the Fed has backed off.

Locally we also see the May jobs numbers today.

Goodman Group ((GMG)) and Graincorp ((GNC)) will host investor days.

Rudi will make his weekly appearance on Sky Business, 12.30-2.30pm, only to return again between 7-8pm for an interview on Switzer TV.

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By Greg Peel

The Dow closed up 17 points or 0.1% while the S&P gained 0.1% to 2112 and the Nasdaq fell 0.1%.

Policy Shock

In his April policy statement, RBA governor Glenn Stevens concluded: “Continued low inflation would provide scope for easier policy, should that be appropriate to lend support to demand.” Inflation proved to indeed be low, so the RBA cut in May to 1.75%.

So low was inflation, as evidenced by the March quarter CPI numbers, that economists immediately pencilled in further rate cuts. August was assumed as the next move, with potentially as many as two more into 2017. Nobody expected a follow-up June cut, so yesterday economists were simply looking for confirmation that the RBA remained in an easing mode. But this was the conclusion of yesterday’s statement:

“Taking account of the available information, and having eased monetary policy at its May meeting, the Board judged that holding the stance of policy unchanged at this meeting would be consistent with sustainable growth in the economy and inflation returning to target over time.”

The RBA is not in an easing mode at all. Having cut once, it has returned to a “holding stance”.

That is why the Aussie dollar shot up a cent yesterday at 2.30pm. This morning the Aussie is 1.2% higher over 24 hours at US$0.7458.

It’s also why the ASX200, having peaked at 32 points up on the day around lunchtime yesterday, was back to square by 3.20pm. A slight recovery thereafter left a close of up 10 points.

Among those sectors suddenly turning tail were the banks, although they still managed to close with a sufficient gain to offset further insurance company selling in the financials sector. Utilities managed a flat close, while telcos fell 0.4% and consumer staples 1.0% as yield-plays lost some of their gloss. Although the flipside is the benefit of the Fed supposedly not raising.

The Fed not raising implies less strength in the greenback, so the resources sectors were able to lead the gains yesterday to offset the losses in other sectors, thanks to higher commodity prices. Materials rose 1.1% and energy 1.7%.

But for local investors, it’s back to square one. If the ASX200 was to push up through 5400 as the technicals have been suggesting, it would require a combination of a lower local interest rate and a subsequently weaker Aussie dollar to provide support. That doesn’t look like happening now, so we have to look forward past the June Fed meeting, the Brexit vote and the local federal election towards the August result season before – left field events notwithstanding – this market finds a new impetus.

Perhaps that impetus could come from rising commodity prices – oil closed above 50 last night and iron ore is up another 3% -- but just how far can these rallies run when capacity is idled?

Getting High

WTI crude rallied 1.4% last night to its first close above US$50/bbl in ten months. Disruptions in Nigerian supply aside, the oil market has begun to focus more on rising global demand.

The energy sector drove Wall Street higher last night, backed up by an ongoing feeling of relief following the Fed’s apparent back-down on a summer rate hike. Having closed above 2100 on Monday night, the S&P500 was also supported by the technicals, with traders beginning to eye off the all-time high of 2134.

But while the S&P500 is the traders’ preferred indicator, being a broad market, cap-weighted index, the antiquated Dow average still has lingering power. When the Dow hit 18,000 last night, the sellers moved in.

Round numbers are always difficult to breach in one go. The S&P is still sitting above 2100, but clearly more work will need to be done to get to the Dow all-time high of 18,188.

Next week’s June Fed meeting is no longer as critical as it was a week ago, given no one is expecting a rate hike. Then there’s the Brexit vote, which is the big unknown for markets. Perhaps new all-time highs on Wall Street will have to wait until a Brexit outcome is clear.

Then there’s the small matter of a looming presidential election, which many believe will also serve to keep the Fed at bay. Rate hike expectations have shifted away from the summer and towards year-end, with September a chance but December now preferred. By December, the Fed will know who will be controlling fiscal policy for the next four years.

Commodities

West Texas crude is up US71c at US$50.43/bbl. Many are assuming 50 is the line in the sand for the recovery rally, given it is a sufficient price to trigger the restart of idled production. The US Energy Information Administration nevertheless begs to differ.

“Low oil prices continue to cut into domestic oil production, with US monthly oil output not expected to start steadily increasing until the end of 2017,” said an EIA statement last night. This implies oil prices still have further upside on increasing demand.

The Fed-inspired base metals rally of the past few days came to an abrupt halt last night as commodity funds decided a weaker US dollar is not in itself enough to suggest higher prices. Copper was slapped 2.7% in London, while lead fell 2% and nickel and zinc 1%. Only aluminium was spared, with a 0.5% gain.

Iron ore rose US$1.70 to US$52.30/bbl.

The US dollar index is down 0.2% at 93.84 but gold remains steady at US$1243.20/oz.

Today

The SPI Overnight closed down 18 points or 0.3%. The RBA statement has taken the wind out of the sails.

Locally we’ll see housing finance numbers out today, while much attention will be paid to the release of China’s May trade data.

Vicinity Centres ((VCX)) will host an investor day today.
 

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By Greg Peel

The Dow rose 113 points or 0.6% while the S&P gained 0.5% to 2109 and the Nasdaq added 0.5%.

Interest Rate Tango

Three factors impacted on the local market yesterday: Friday night’s weak US jobs number; yesterday’s weak local inflation gauge; and the storms wreaking havoc on Australia’s east coast.

While Wall Street would have been surprised if the Fed chose to hike again as early as this month, Friday night’s shockingly weak US jobs number left markets in no doubt it’s not going to happen. Janet Yellen has since implied as much overnight. This has two implications for Australian stocks.

Firstly, the resultant plunge in the US dollar lifted commodity prices and in particular the gold price, lighting a fire under the materials sector yesterday. While gold stocks rallied hard, 4% gains for both BHP Billiton ((BHP) and Rio Tinto ((RIO)), thanks to stronger iron ore and copper prices, helped drive the materials sector up 3.8% to be the clear winner on the day.

Secondly, a move up in US rates makes Australian yield stocks incrementally less attractive to US investors, hence the fact the weak jobs number has killed that off for now provided incentive to buy the yield-payers, being the banks, utilities, consumer staples and to some extent, BHP and Rio. Telcos should also be in that group, but they stayed put yesterday, probably because of weekend outages due to the storm.

The flipside of no US rate hike being positive for yield-payers is an RBA rate cut also being positive for yield-payers. From May into June we’ve seen expectations of further RBA rate cuts leap up on the weak March quarter CPI result and fall back again on the strong March quarter GDP result. Yesterday the Melbourne Institute’s monthly inflation gauge showed a 0.2% fall in headline inflation in May.

That follows April’s 0.1% gain, and takes annual inflation to 1.0%, down from 1.2% in April. That’s the lowest annual reading ever in the history of the gauge. Result? The market is now back to expecting further RBA rate cuts – not today, but probably in August and beyond.

So yesterday the yield-payers were more attractive on two counts. At 0.3%, yesterday’s rise in the financials sector reflected a balance between bank buying and insurance company selling, thanks to the storm. Consumer discretionary missed out, likely due to the impact on retail trade, albeit this sector often sees benefits down the track as affected households look to replace damaged furniture, whitegoods et al.

Add it all up and we saw a 0.8% gain for the ASX200 to 5360. The lead-in is positive again overnight, suggesting further upside today. Technically, if the market holds above 5350 the trend remains to the upside.

Coming Months?

Wall Street opened higher last night before settling down to await a speech by Fed chair Janet Yellen which by coincidence happened to be scheduled for one trading day after the weak jobs number.

In her speech, Yellen echoed the view of many in the market that one should not read too much into one strange looking data release, ie the surprisingly weak May jobs number, but instead concentrate on the trend. Assuming the trend remains intact, the Fed still intends to raise interest rates.

Yellen also confirmed the view of many in the market that the next hike will not be this month, ahead of the Brexit vote. The Fed chair made specific mention of the potential of this event to impact heavily on market sentiment. July would then tighten in the odds, but for one rather glaring omission.

In her previous speech, Yellen had underscored the more hawkish views of her FOMC colleagues in suggesting the next rate hike would occur in “the coming months”. Now, while in theory every month is “coming”, hence this hardly nails down the date, Wall Street took this to mean quite possibly June/July. But last night, all of a sudden, the “coming months” suggestion was gone from Yellen’s rhetoric.

Thus while Wall Street had already assumed the weak jobs number took both June and July off the table, Yellen’s comments, or lack thereof, have now reinforced that view.

This was enough to kick Wall Street on last night to its strongest closing level in 2016.

Commodities

A decent jump in the oil price also contributed to Wall Street strength. Oil did not participate in the post jobs number commodity price rally on Friday night because of the first jump in the US rig count in eleven months. But with Yellen’s effective confirmation, and further pipeline attacks in Nigeria, last night West Texas crude rose US82c to US$49.72/bbl.

Copper was the star base metal on Friday night while the others were caught in the headlights, but last night aluminium and lead rose over half a percent, and nickel and zinc both rose around two percent. Copper had a rest.

Iron ore is up another US$1.10 at US$50.60/t – back above the psychologically critical 50 mark.

Gold had its big move on Friday night and is steady at US$1244.70/oz, thanks to the US dollar index ticking back up 0.2% to 94.04.

The Aussie is steady at US$0.7365.

Today

The SPI Overnight closed up 15 points or 0.3%.

We saw 4% gains for BHP and Rio on the local market yesterday, and in London overnight the big miners each gained 6%. While there’ll be an element of double-counting, gains in iron ore and oil last night should ensure further strength today.

At 2.30pm the RBA will release a policy statement that will leave the cash rate unchanged, so the market will be very eager to read between Glenn Stevens’ lines to gauge whether an August rate cut is still a likelihood.

Meanwhile, as the storm rages on through Tasmania and damage begins to be assessed in Queensland and NSW, the scramble is on amongst analysts to figure out which of the insurers will be hardest hit and by how much, and which have sufficient reserves set aside.

Rudi will link up with Sky Business via Skype at around 11.15am today to discuss broker calls.
 

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By Greg Peel

The Dow closed up 48 points or 0.3% while the S&P gained 0.3% to 2105 and the Nasdaq rose 0.4%.

June Swoon

It’s as if someone called “last drinks” on the rally at the end of May and the punters have been gradually making their way out the door ever since. May saw the ASX200 rally from around 5250 to over 5400 and the past three sessions have us back at 5278. Were the market to break back down through 5250 it would be technically bearish, although we’ve seen a big jump in the futures overnight.

The change of heart between May to June has been all about a contradiction having arisen between Australian inflation and Australian economic output. The weak March quarter CPI result prompted the RBA to cut the cash rate and economists to predict at least one if not three more to come. This week’s March quarter GDP made the market think again. It’s a tough one, given typically one would expect strong economic growth to drive stronger inflation. But really all we’ve seen is solid sales of rocks while price and wage growth has been non-existent.

Then we can throw in the Fed, which Wall Street has come to believe will hike again in July, if not in June. A Fed rate hike by default acts like an RBA rate cut via the exchange rate.

The banks had been the major driver of the rally in May, on a supposed promise of lower local rates to come, which offer up the opportunity for mortgage repricing and eases the pressure on bad debts. The banks have now led the index back down again.

There was not much happening yesterday ahead of the day’s economic data releases. And again, the April data is underscoring the contradiction of the March quarter. Retail sales rose by a modest 0.2%, missing expectations and leaving the annual growth rate unchanged at 3.6%. This number points to low inflation. Meanwhile the trade deficit fell in April, driven by a 0.6% rise in exports and 0.8% fall in imports. The positive trade numbers echo the GDP strength.

The market sided with the GDP, and sold the banks down again, by an influential 1.2%. Materials backed up with a 1.0% fall on lower copper and iron ore prices. Healthcare lost 0.7% after one broking house downgraded the listed aged care sub-sector but otherwise there wasn’t much else going on.

Interestingly, the SPI Overnight has closed up 40 points or 0.8%, when Wall Street only rose 0.3% and commodity prices are again lower. Perhaps as we near 5250 in the physical, traders who sold at 5400 are now looking to get back in on better value.

Do Jobs Matter?

For the second session in a row, Wall Street fell on the open and rallied back to the close. This time the indices finished a little higher, such that the S&P500 is sitting above the 2100 level – significant because it is a round number.

Wall Street has now gone into summer-lite mode, with the long weekend signaling the beginning of the annual leave period. Volumes typically drop in the summer, and there was never going to be much going on last night ahead of tonight’s jobs number.

OPEC oil ministers held their regular mid-year meeting last night for the world’s amusement, which, blow me down, did not produce any agreement. The oil price is little changed.

Otherwise, the question on Wall Street last night was not so much “What’s the jobs number going to be?”, but more a case of “Does it really matter what the jobs number is?”. The “whisper” number is 160,000, which is in line with April and below the 200,000 trend of previous months. But there is a complication with regard the 35,000 Verizon workers who went on strike has month, and either way Wall Street is coming to believe the Fed has already made up its mind.

If it wasn’t for the Brexit vote, the Fed would hike in June. Because of the Brexit vote, they’ll hold off till July. So what impact is this final bit of data meant to have?

And these days it’s never quite clear whether Wall Street wants good news or bad news anyway. The S&P500 is back at its April high and only 34 points from the all-time high. There doesn’t seem to be a lot of rate rise fear.

Commodities

West Texas crude is up US15c at US$49.06/bbl.

Copper has fallen another half a percent and aluminium 2%.

Iron ore fell US$1.40 to US$47.90/t.

The US dollar index is slightly higher at 95.54 and gold is slightly lower at US$1210.40/oz.

The Aussie is down 0.4% at US$0.7227 and is right back where it was before this week’s GDP result.

Today

The SPI Overnight closed up 40 points or 0.8%.

It’s service sector PMI day across the globe today, including Caixin’s take on China.

US jobs tonight.

Asciano ((AIO)) holds an EGM today to discuss the wolves at the door.

Rudi will Skype-link with Sky Business this morning, likely around 11.05am to discuss broker calls.
 

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