High price momentum stocks fall further

Janet Yellen was again testifying to an economic committee overnight - this time in the Senate. 

However, unlike yesterday’s Congress facing testimony, last night’s meeting was a complete regurgitation, meaning the kick the US markets saw from the ‘high degree of monetary accommodation remaining warranted’ statement was already factored in and left markets flat and unresponsive.

It did however see the eight-week rotation thematic of the breakdown in high price momentum plays accelerate. There is no doubt global markets are starting to position themselves for a shift away from high growth into defensive plays. The breakdown in high price momentum stocks like Tesla, Amazon, Twitter, E*TRADE coupled with the falls seen in LinkedIn and Yahoo Inc. in the last eight weeks are signs that the US is looking to safe-guard profits and that a new thematic of trade is brewing – the return of capital.

This is an interesting dilemma for Australian investors in Australian stocks; the return of capital trade has been the trade for last three years. The development of this in the US suggests that the carry trade from the US and Japan is likely to continue to support the dividend players, despite the fact they are on the limiter on yield metrics. If the RBA does flick the switch on rates over the coming months, this trade is likely to fade as Australian bonds look very attractive and an increased yield will pull yield hunters out of equities; foreign investors are also not entitled to franking credits, which is a double hit and  an area to watch.

On the topic of central banks, Mario Draghi has done it again, creating a massive bearish reversal on EUR/USD at $1.40. His statement saw the pair falling over 1.4 cents as he cleared the decks for a certain rate cut in June. Deflation continues to stalk the periphery and Draghi himself singled out the effect that the currency is having on the zone. ‘The strength of the exchange rate in the context of low inflation is cause for serious concern.’ The direct link between the EUR and inflation means there is only one option at the June meeting and that is for the pre-stated increase to monetary accommodation. This will be a DAX and CAC positive considering the export-driven, manufacturing-based economies they are.

On the flipside of imminent central bank easing, the RBA will be watched for signs of hawkishness in the minutes today. Despite the fact that the statement on Tuesday was almost a carbon copy of the April statement, further colour on how the bank sees the east coast recovery and the rise of the housing market should be laid out. Whether the employment reads over the last three months are instilling confidence in the consumer credit market is yet to be seen. Finally how it sees China tracking and the fact that imports are still holding, and if record iron ore shipments are still supporting the underlying economy are still in question.

Any signs of hawkishness will confirm the rise in the AUD. Since the rate decision on Tuesday the AUD has seen positive moments on China data and employment data; today’s minutes could confirm this rise.

Ahead of the Australian Open

We are currently calling the Aussie market down nine points to 5468 on the 10:00am bell (AEST) as iron ore falls to its lowest level since October 2012. The price has now lost 23% year-to-date and that isn’t offset when converted to AUD. At US$103.70 a tonne (A$110.54) margins are still chunky, however it is a concern that collateral at Chinese ports is dwindling by the day and a further collapse is possible. Materials are the plays to watch today and are likely to drag.

ANZ and Macquarie are both turning ex-dividend and this too will drag on the market, so don’t be concerned to see ANZ falling by more than 2%.  

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