Stocks, crude and the Aussie dollar continued to defy the bears overnight.
Where the Aussie dollar and oil rallies were solid, the move higher in US equities, which took the Dow back over 18,000 and saw the S&P make another new 2016 high close of 2119, was a grinding move.
This combination, and overall commodity strength more broadly, may help the ASX200 finally best 5400 today. Certainly the SPI 200 June contract is only up 9 points this morning but the recovery of local stocks from levels that could have seen solid selling yesterday has to be encouraging.
Elsewhere the Kiwi rocketed after the RBNZ left rates on hold, the iron ore price recovery continues, and the US dollar is a little weaker across the board.
1. Our political leaders were battling over their budget outlooks and deficits yesterday but neither side has any idea. Yesterday the election battleground moved to the budget, its deficit, balance and the question of when it will return to surplus. Labor promised bigger deficits than the coalition over the next few years but also that it would get the budget back to surplus on the same time frame as the coalitions forecasts. Those big deficits had some senior Australian economists saying that might threaten Australia's AAA rating.
The problem for Labor, and the government, is that forecasts of a return to surplus have been consistently wrong for years. That's with both sides of politics in charge. So we can take what they say with a grain of salt. But we know in all likelihood unless another mining boom turns up, the risk is on the downside.
That's the unequivocal conclusion you have to take away from S&P's latest research which delivers a withering critique of why governments never get their budget forecasts right. They say that treasuries, central banks, supranationals like the OECD, and economists more broadly have no idea how to measure the potential growth in an economy. Therefore, they can't actually tell what the level of growth is going to be in the economy and as such can't forecast the budget balance and deficit.
You can read the details in my piece. But here's why it matters. It matters because while the pollies pretend faux accuracy around growth a year, or two, four or now 10 into the future and put off the big reforms, the big issues, we all pay the price and the economy muddles through and the big issues never get tackled.
2. The RBNZ left rates on hold at 2.25% and the Kiwi rocketed, dragging the Aussie close to 75 cents. Reuters closes off the day's gains in forex land at 7am Sydney/Melbourne time at the moment. So the euro, yen and pound are all 0.05% either side of flat. Not so the New Zealand dollar however. It's up 1.2% at 0.7087 after a brief foray above 71 cents after the RBNZ left rates on hold at 2.25%.
The Aussie dollar's rally is nothing in comparison – it's up 0.15% at 0.7481 since the RBNZ announcement at 7am. Its high was 75 cents which is an important resistance zone. But it seems the buyers are swinging in behind the Aussie. Yesterday Westpac said it wants to buy Aussie dollar dips because it sees short-term upside for the Australian dollar. In my experience, when we get folks wanting to "buy the dip" but not at current levels it's a signal for solid support and further rallies.
3. Deutsche Bank's chief economist emasculated Mario Draghi's "whatever it takes" policy and in doing so showed why the RBA will not want to cut rates again unless it has to. David Folkerts-Landau, DB's chief economist, says that the ECB has gone badly off course and needs to correct itself before it makes some "catastrophic" mistakes, Will Martin reports.
Folkerts-Landau says the bank should abandon negative rates and stop the mass bond-buying program (as an aside, the ECB started buying corporate bonds last night) because "it is clear that lower and lower interest rates and ever larger purchases are confronting the law of decreasing returns. What is more, the ECB has lost credibility within markets and more worryingly among the public".
He thinks the ECB's policy "is threatening the European project as a whole".
What Folkerts-Landau also does in his discussion of the negative impacts and diminishing returns of negative rates in Europe, but essentially all over the globe, is highlight why the RBA will be a reluctant cutter. Increasingly it looks like super low rates are having the opposite effect on growth and inflation than the banks hoped for. Japan is just the latest example on the impact on consumers of their move to zero earlier this year. So while the RBA is still likely to cut again, unless the economy is weak, they appear unlikely to go below 1.50%.
4. It might be time to rethink your bearishness about the global economy. Time for the outside view. That's the view where you challenge yourself to think outside the box, your paradigm, company, economy, whatever the situation happens to be and challenge your thinking. Kind of the devils advocate position.
Signs are emerging that a downturn in the United States and China, the world's two biggest economies, may have bottomed out, the OECD's monthly leading indicator showed on Wednesday. The Paris-based Organisation for Economic Cooperation and Development said its leading indicator (CLI) for the United States improved to 98.95 in April from 98.93 in March, the first increase in the reading since July 2014.. The index for China rose to 98.41 in April from 98.38 in March, its second consecutive monthly increase. The reading fell below the 100 mark in October 2014.
Both are below 100. So it's not exactly cartwheel time, but this could be significant. It could also have huge implications for global markets and adds some fundamental impetus to my view the commodity cycle bottomed earlier this year.
5. Janet Yellen's favourite jobs indicator was NOT weak.38,000 new jobs in May was a terrible outcome for non-farm payrolls. There is no other way to put it. But news overnight puts the US jobs market in slightly different light. Akin Oyedele reports there were a record 5.788 million job openings in the US in April, according to the latest Job Openings and Labour Turnover Survey (JOLTS). RECORD folks. That's not the sign of a weak jobs market.
Akin reminds us that in a speech on Monday, Federal Reserve chair Janet Yellen referenced the previous record number of job openings as a sign that the labour market has been positive overall, even after new job additions fell to a six-year low last month.
So rates will still be rising in the US it seems.
6. Big stock market crashes are becoming more frequent. It wouldn't be a 6 things without something from Bob Bryan, so I'm including his little graphic from Christian Mueller-Glissmann, a strategist at Goldman Sachs, of every stock market crash for the past 60 years.
NZ: Manuf. sales volumes (qoq%), Q1: -1.2 vs. 1.3 prev.
AU: Home loans (m/m%), Apr: 1.7 vs. 2.5 exp.
CH: Trade balance ($bn), May: 50.0 vs. 55.7 exp.
UK: Industrial production (m/m%), Apr: 2.0 vs. 0.0 exp.
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The NSW Government budget on 21 June will hold plenty of interest for private hospital operators. The industry will be keen to see if the government announces any further proposals to develop hospitals through public/private partnerships. Healthscope won the contract to develop and then operate Sydney's new Northern Beaches hospital at French's Forest. This is now into the construction phase.
Healthscope's share price is approaching chart support around $2.85/$2.83. This is made up of an established trend line and the 38.2% Fibonacci retracement level. In the current circumstances, the chances are this could hold. However, if it doesn't, prospective buyers might ultimately get a crack at deeper retracement levels around $2.70 or even $2.60.