Category: Stock Markets

From Leith van Onselen

Among all of the factors that drive house price growth, arguably the most important is the flow of housing finance commitments, which has shown an incredibly strong correlation with dwelling price growth over recent decades.

The above chart tracks RP Data’s annual dwelling price growth at the 5-city level against total Australian housing finance commitments (excluding refinancings), and shows a strong correlation with the exception of the past year, where the two series have diverged….

Leith highlights the reason for the recent divergence: strong presence of foreign property buyers in Sydney, Melbourne and Brisbane. But with China ramping up capital controls to support the Yuan, how long is this going to last?

Source: The best indicator of house prices points down – MacroBusiness

From David Scutt:

….The chart below, supplied by the NAB, reveals the contributing factors in the recent recovery in the NAB’s Australian dollar fair value model. Based on their assessment, the drop in market volatility has been the major driving force behind the recent rally in the Aussie.

While the NAB, like many others, predicts that the Aussie’s move higher won’t last, forecasting that the AUD/USD will still finish the year buying 67 cents, in the near term it suggests that “it is going to take some sort of shock” for the AUD/USD not to approach or test the .7830/80 level.

Source: NAB: Why the Australian dollar is rallying and could move above 78 cents | Business Insider

An important reminder from Narayana Kocherlakota:

For more than 20 years, China has kept the yuan’s value against the dollar in a very tight range. Although the exchange rate isn’t actually pegged (the Chinese currency has appreciated at a rate of about 2 percent per year against the dollar over the past ten years), financial markets have come to expect little short-term volatility, and were unpleasantly surprised when the yuan dropped 1.9 percent in one day against the dollar last August.

This connection between the yuan and the dollar has important implications for the impact of U.S. monetary policy on China……If China holds its exchange rate to the dollar stable, the Fed’s moves will also cause the yuan to appreciate against those other currencies, putting downward pressure on Chinese inflation and employment at a time when this might not be appropriate for the Chinese economy…… the time may have come for China to break away from its currency union with the U.S.

Any such breakup presents a big problem: Many businesses and financial institutions have entered into contracts that make sense only under the premise that the exchange rate is not going to vary much over time. If, say, a Chinese firm owes a lot of U.S. dollars to a lender, a sudden change in the yuan-dollar exchange rate can make the debt unbearable, precipitating a default that would harm both the borrower and the lender. These risks matter not only for the Chinese economy, but also for the state of global finance and for the U.S. economy.

…..There’s a significant risk that if the Fed keeps tightening in 2016, it could force an abrupt breakup. The resultant disorder in the world economy would not serve Americans well.

I used the analogy recently of a giant panda running loose in a lifeboat, destabilizing the global economy. Collapse of the Yuan-Dollar peg would disrupt financial markets, hurting most global economies, not just China and the US. The alternative, holding firm on the peg, would cause severe economic stress to China and its major trading partners, including Australia, but is the lesser of two evils.

Source: The Real Reason to Worry About China – Bloomberg View

From Lu Wang:

Standard & Poor’s 500 Index constituents are poised to repurchase as much as $165 billion of stock this quarter, approaching a record reached in 2007. The buying contrasts with rampant selling by clients of mutual and exchange-traded funds, who after pulling $40 billion since January are on pace for one of the biggest quarterly withdrawals ever.

…..David Kostin, the chief U.S. equity strategist at Goldman Sachs Group Inc., said companies tend to enact a blackout period and restrict share repurchases in the month following the end of a calendar quarter, and come back once they’ve reported results. In a market where everyone else is selling, the ebb and flow of corporate actions have amplified volatility. The S&P 500 slumped 11 percent in the first six weeks of the year before staging a rebound that has since trimmed the drop to about 1 percent…..

Source: There’s Only One Buyer Keeping S&P 500’s Bull Market Alive – Bloomberg Business

From Jasmine Ng at AFR:

“Don’t let wild, short-term price swings distract us from our analysis of the market,” Li Xinchuang, deputy secretary- general of the China Iron & Steel Association (CISA), said after iron ore surged on Monday by the most on record.”How can the rally possibly be sustained?” he asked.

…..Steel demand in China, which contracted 5.4 per cent last year, will shrink an additional 3 per cent this year, he said. Port inventories of iron ore have expanded 13 per cent in the past year, according to Shanghai Steelhome Information Technology Co. The global seaborne glut is estimated at 45.8 million tonnes this year and 34.1 million tonnes in 2017, Morgan Stanley said in a report last month.

You would expect Li to be calling for an end to the rally. But he does have a point: supply is expanding while production is contracting. You don’t have to be a metallurgist to figure the outcome.

Source: Chinese steel producers say don’t count on a lasting iron ore rally | afr.com

From Bob Doll at Nuveen Investments:

It May Take Better News for the Rally to Continue

Financial markets appear to be normalizing in recent weeks after the risk asset rout that started the year. We would caution, however, that market improvements have come about because the news has become less bad, not because it has turned good. Investor sentiment is fragile and will likely remain so for some time. One of the key variables remains oil prices. Oil markets have stabilized in recent weeks, but volatility and a renewed downturn could occur anytime. We also believe we need a sustained improvement in U.S. and Chinese economic data before investors grow more confident. Finally, the global political system remains a wildcard. The current focus is on the possibility of the United Kingdom leaving the European Union. The odds favor the status quo, but a potential “brexit” would be destabilizing for the U.K., and the uncertainty is fueling downward pressure on risk assets.

I agree with Bob’s view that a broad US recession is unlikely. Energy and Materials sectors are contracting but the rest of the market has so far held up well. But I am concerned that profit margins are falling and sales growth is slowing — which could lead to weaker stock prices.

Shrinking bank net interest margins and a flattening yield curve both warn of a future credit contraction, however, that would make recession highly likely. Based on past (reactive rather than proactive) performance by the Fed we cannot expect swift action to avoid this threat.

Source: Weekly Investment Commentary from Bob Doll | Nuveen Investments