NAB market strategist Tapas Strickland agrees, saying an updated S&P 500 valuation analysis found that there’s room for the index to fall as much as 14.5 per cent from its current level.
And Allianz chief economic adviser Mohamed El-Erian as well as Morgan Stanley chief US equity strategist Mike Wilson also are advising caution.
Horizon Investments’ chief global strategist Greg Valliere said investors need to see progress on two additional fronts – trade and the US federal government shutdown – to clear the path forward.
“We think there will be progress this week as US and Chinese officials meet in Beijing. Both sides have compelling reasons to act – China quite clearly is suffering from an economic slowdown, and Donald Trump obviously fears that a nervous stock market could imperil his re-election.”
President Trump, according to the New York Times, has asked the US top TV networks for time on Tuesday night to speak about the shutdown. He plans to travel to the southern border with Mexico later this week to press his case for funding for a wall.
The Australian dollar extended its rally in the wake of last week’s flash crash.
“The AUD has made further advances overnight albeit not by much, to a high of 0.7150 from around 0.7125 towards the end of the Sydney day Monday, Sino-US trade optimism still the principal fundamental driver. AUD gains have though been exceeded by most other currencies, NOK, SEK, CHF, EUR and CAD all showing bigger gains,” NAB head of FX strategy Ray Attrill said in a morning note.
“The JPY is again the only currency down against the USD; symptomatic of the sudden loss of demand for safe haven currencies.
“Instructive here is that the USD has, in narrow DXY index terms, just recorded its lowest levels since 22nd October 2018 (low o/n of 95.64). This is over 2% down on its mid-December highs and after a period where the USD wasn’t receiving as much safe haven support during the late December market ructions as one would normally expect, falling US yields notwithstanding.
So even if the US rates market is getting ahead of itself pricing in the commencement of a Fed easing cycle as early as late 2019, it is going to take lot to get the USD back near its 2018 range highs,” Mr Attrill said.
“We don’t expect it, the flipside of which is that last week’s ‘flash crash’ low on AUD/USD at 0.6730 shouldn’t be seen again this year. We say this even if it transpires that incoming Australian data is seen to add to risks of the RBA’s next rate move being down.”
Local data: Trade balance November, ANZ job ads December
Overseas data: German industrial production November; Euro zone consumer confidence December final; US NFIB small business optimism December, Trade balance November, Consumer credit November
Capital Economics on Germany’s economy: “German industrial orders for November [released overnight] were not so encouraging, as they fell by 1.0%. This suggests that our forecast for German industrial production to have risen by 0.3% m/m that month … may turn out to be too optimistic.”
SPI futures up 5 points or 0.1% to 5636 at 7.30am AEDT
AUD +0.4% to 71.42 US cents
On Wall St at 3.28pm: Dow +0.7% S&P 500 +0.8% Nasdaq +1.5%
In New York, BHP +0.5% Rio +1.2% Atlassian +7.5%
In Europe: Stoxx 50 -0.3% FTSE -0.4% CAC -0.4% DAX -0.2%
Spot gold +0.2% to $US1288.24 an ounce at 1.14pm New York time
Brent crude +2% to $US58.22 a barrel
US oil +2.7% to $US49.24 a barrel
Iron ore +0.6% to $US73.51 a tonne
Dalian iron ore +0.8% to 513.50 a tonne
LME aluminium +0.7% to $US1878.50 a tonne
LME copper +0.1% to $US5923 a tonne
2-year yield: US 2.53% Australia 1.81%
5-year yield: US 2.53% Australia 1.96%
10-year yield: US 2.70% Australia 2.27% Germany 0.22%
US-Australia 10-year yield gap as of 7.39am AEDT: 43 basis points
From Today’s Financial Review
Challenging’ year ahead for ASX listings: The ASX is bracing for a “challenging” start to the year for listings amid the most difficult conditions for large cap floats the bourse has seen in several years.
Your guide to undervalued stocks: Investors looking for bargains could well start with our analysis of the top 100 companies ranked by the percentage discount to the consensus share price targets of the country’s leading broking analysts.
Brakes slammed on small business: Given homes are used as security for many small business loans, tighter bank assessments have dried up SME credit, the ombudsman and senior bankers have warned.
S&P 500 could still be 14.5pc overvalued: The S&P 500 could still be as much as 14 per cent overvalued, and that could keep the Federal Reserve on the sidelines through the first half of 2019, according to NAB.
Has a bottom been established? El-Erian: Caution is still warranted, argues Mohamed El-Erian, as it’s not yet clear that selling has reached a floor.
Capital Economics on the ISM services report: “The fall in the ISM non-manufacturing index in December, to 57.6, was more modest than the slump in the manufacturing index, and is still consistent with GDP growth of close to 3% annualised. Overall, while there is still no sign of an imminent collapse in the economy, this release supports our long-held view that a shifting policy mix will lead to a gradual slowdown in economic growth this year.”
TD on the ISM report: “As is often the case, the ISM non-manufacturing index joined its manufacturing counterpart last month, with the pace of expansion slowing in December. After staying above 60-points for three consecutive months – the best three month streak since its inception – some payback was expected. Overall, the index remains at a high level, but the decline underscores that the high water mark in economic growth may be behind us.”
Mike Wilson, Morgan Stanley’s chief US equity strategist ,whose 2018 prediction for a rolling bear market proved prescient, says in his late note to clients that, while he’s less pessimistic about stocks, investors hoping to buy the dip should be aware that a plunge in a gauge of US manufacturing and Apple’s sales warning are likely the start of a new round of negative news.
“We are definitely more constructive than we have been in over a year based on valuation, sentiment, and positioning, but we don’t think it is time to blow the all clear signal yet,” Wilson wrote in a note to clients. “The weak PMI and AAPL’s miss last week are unlikely isolated incidents.”
Wilson’s view contrasts with strategists from Bank of America and Citigroup, both of which on Friday urged investors to buy the dip, citing deteriorating investor sentiment.
While a change in the Fed’s tone from last year, investors need more assurance than just words after the central bank in December lifted interest rates for a ninth time since 2015, according to Wilson.
“The Fed needs to shift from a more dovish tone to more dovish action (stop raising rates and/or reducing the balance sheet), and we need to get past some incrementally negative data points that we suspect are still lingering,” Wilson said. There are probably “more ‘Apples’ looming out there as we enter 4Q earnings season.”
The S&P 500 will find a hard time sustaining rallies above the range of 2600 to 2650, levels that stemmed from declines during 2018 and have now turned into resistance points for the market, according to Wilson.
European shares fell back on Monday, after rebounding at the end of last week, as lingering worries about the euro zone economy, Brexit and the US government shutdown offset hopes for a truce between Washington and Beijing over trade.
The pan-European STOXX 600 index closed down 0.2 per cent.
Although UK stocks opened higher, the FTSE 100 – which makes about 70 per cent of its income abroad – erased those early gains to slip 0.4 per cent on the day, with tobacco and consumer staples, including AstraZeneca , Reckitt Benckiser, Unilever, the biggest drags, weighed down by a weaker dollar.
British American Tobacco and Imperial Brands extended losses to shed 4.2 per cent and 5 per cent, respectively, after a Cowen downgrade in light of higher e-cigarette use among youngsters.
Miners helped cushion the market’s fall as metals prices climbed after China cut reserve requirement ratios.
Sainsbury’s, Tesco and Morrisons rose 1.8-2.6 per cent after German discount supermarket Aldi’s British unit reported higher sales for the Christmas week.
UK retailers will be in focus this week with other supermarkets and high street chains also due to issue Christmas trading updates, as investors seek confirmation of how the battered sector fared over the holiday.
Hong Kong shares ended higher on Monday after China’s central bank cut banks’ reserve requirements to boost the economy. At the close of trade, the Hang Seng index was up 0.8 per cent at 25,835.70. The Hang Seng China Enterprises index rose 0.9 per cent to 10,123.85.
China’s main Shanghai Composite index closed up 0.7 per cent at 2533.09, while the blue-chip CSI300 index ended up 0.6 per cent.
Around the region, MSCI’s Asia ex-Japan stock index was firmer by 1.3 per cent, while Japan’s Nikkei index closed up 2.4 per cent.
The broader Topix was 2.8 per cent higher at 1512.53, with all of its 33 subsectors trading in positive territory.
Investors this week await quarterly earnings from companies whose business years end in February and August. Companies in focus include Fast Retailing, FamilyMart UNY Holdings and factory automation machinery maker Yaskawa Electric Corp. Earnings from Yaskawa, which has large exposure to China, will be of particular interest, as traders look for any indication of how demand from China is faring, analysts said.
Summers rejects negative rates policy: Former US Treasury Secretary Lawrence Summers has signed onto a paper that gives negative rates policy a damning review.
Amplifying Global FX on the AUD’s link to Chinese equities: “Chinese equities face a crossroad to start the year as the market mulls a more serious phase in the structural decline in China’s economy balanced against renewed efforts to stimulate growth in 2019. The US-China trade dispute and broader US policy shift to contain China’s economic ambitions in high tech industries have contributed to fears of a Chinese led global economic downturn.
“But these concerns may ease as China and the US progress through trade negotiations restarted amidst a truce on tariff policy through 1-March. The AUD and copper prices have been highly correlated with Chinese equities over the last year, highlighting the broader market implications of trade talks this week and renewed Chinese efforts to restore economic confidence.”
Powell muddies Fed’s monetary message: Jerome Powell has managed to assuage fickle financial markets by muddying the central bank’s monetary message, but for how long?
Japan explores crypto ETFs after snubbing futures: Japan’s financial watchdog has abandoned plans to allow listed derivatives based on cryptocurrencies but may yet approve exchange-traded funds that track the asset class.
Capital Economics on China’s FX reserves: “Data released on Monday showed that the value of the PBOC’s foreign exchange reserves amounted to $US3,073bn at the end of December, up $US11bn from a month earlier. Nonetheless, this appears to have been driven by valuation effects owing to movements in exchange rates and bond prices. The PBOC probably continued to sell foreign exchange last month, though only on a small scale. This implies that the renminbi has been under little pressure recently.”
Oil prices climbed about 3 per cent on Monday, rebounding further from 1-1/2-year lows reached in December on support from OPEC production cuts and steadying equities markets. Oil futures have gained about 10 per cent since last Monday.
“Momentum is coming back into the market from very depressed price levels,” Petromatrix strategist Olivier Jakob said.
US crude inventories at Cushing, Oklahoma, the delivery point for US crude futures, fell by 565,000 barrels from last Tuesday to Friday, traders said, citing data from market intelligence firm Genscape.
Goldman Sachs said in a note it had downgraded its average Brent crude oil forecast for 2019 to $US62.50 a barrel from $US70 due to “the strongest macro headwinds since 2015”.
Societe Generale cut its 2019 oil price forecast for Brent by $US9 to $US64 a barrel and reduced its forecast for US light crude by $US9 to $US57 a barrel.
Origin Energy’s APLNG has eyes on new debt deal: Australia Pacific LNG has ramped up plans to refinance part of its giant debt stack, in an effort to be more profitable for its owners including Origin Energy.
Benchmark copper on the London Metal Exchange (LME) closed 0.1 per cent up at $US5923 a tonne after surging 3.2 per cent on Friday in its biggest one-day gain since September 21. It rose from a low base, however, having hit an 18-month low of $US5725 last week.
LME aluminium ended 0.7 per cent up at $US1878.50 a tonne, zinc finished with a gain of 2.5 per cent at $US2498, lead rose 0.2 per cent to $US1953, tin climbed 1 per cent to $US19,750 and nickel, which did not trade at the close, was bid up 0.4 per cent at $US11,150.
The S&P/ASX 200 Index rose 63.8 points, or 1.1 per cent, to 5683.2 and the All Ordinaries advanced 67.5 points, or 1.2 per cent, to 5744.5.
The Australian market rally was driven by the materials sector on Monday after China’s central bank announced it was cutting the amount of cash it required banks to hold, increasingly liquidity in the country and potentially slowing the rate of economic decline on the mainland. BHP Group led the market, rising 3 per cent to $34.39, Rio Tinto climbed 2.7 per cent to $78.90, Fortescue Metal Group advanced 3.3 per cent to $4.44 and South32 closed 2.7 per cent higher at $3.37.
with Reuters, Bloomberg, AAP
Comments? Questions? Let us know what you think of Before the Bell: firstname.lastname@example.org