Calmer heads seem to have prevailed in the US and we are once again seeing a situation where the US economy is seemingly looking ok, while the UK and Europe are showing increasing signs of fragility.
Data wise, the US hit the market with a super strong services ISM report, which not only printed the highest levels in seven months, but the increase was the largest since 2008. The employment sub-component grew nicely, which bodes well for Fridays non-farm payrolls, while the more forward looking new-orders component of the report printed a sizeable 59.9. If we went off this report alone then the Federal Reserve would be putting rates up today, but that is clearly not the case with the May trade balance and dovish (yet largely redundant) set of FOMC minutes keeping the growth bulls in check.
With these dynamics in play we see US Q2 growth running closer to 2.4% to 2.5% and a strong payrolls (over 180,000 jobs) would certainly re-enforce the message that ‘things in the US are not so bad’. In terms of asset markets, the US fixed income market was largely unchanged and it’s no surprise therefore to see the USD index also flat on the day. It is worryingly that the US yield curve (2’s vs 10’s) fell a further three basis points to 79bp and there is just no way the Fed are going to hike when the curve is flattening as aggressively as it is.
In the equity space the S&P 500 had a fairly bullish move, with a mix of health care, energy and consumer discretionary names performing well on the session. Despite all the doom and gloom in global news flow price is true and a break of 2110 would be positive and suggest reloading on a long bias; at least on US equities.
Asian markets should respond well to the US lead, although Europe continues to underperform with news of three more UK property funds halting redemptions. More concerns about the European banking system are in play and its worth keeping an eye on the Italian MIB for a re-test and potential break of 15,000. We’ve seen better stability in the British pound and this seems to have underpinned buying in the AUD/USD as well if we look at the correlation. AUD/USD has recaptured the 75c handle, helped by a bid in oil prices and a general better feel to risk appetite and a break of $0.7545 (both the Monday and Tuesdays high) would be a significant development. Some will make the connection that the AUD caught a bid on the view that the Liberals are closer to forming a majority government, but I am just not convinced.
The correlation between GBP/USD (white line) and AUD/USD (yellow)
The ASX 200 is staring at an open at 5237, so a modest uplift of 0.8%. BHP Billiton Ltd (NYSE:BHP) looks set to open 1.5% higher, with the banking sector also likely to find better buyers. Gold stocks are worth putting on the watch list, if they aren’t already, as the moves in 2016 have been outrageous, with St Barbara Ltd (AX:SBM) leading the charge with a 144% gain. Gold prices are a touch lower from the ASX 200 close and this may play into some profit taking today and looking at price action in SBM, by way of example, the bears seem to have wrestled back some sort of control and a lower low today and specifically a close below $3.25 would suggest a reversal could be in play.
Technically, the ASX 200 continues to trend lower, with a series of lower highs and lows in play. It’s hard to be bullish on the market until we can see both a break of the May downtrend at 5285 and then subsequently the July 5 high. Until this dynamic changes the ASX 200 is likely to be sold into strength.
