Rumour mill creating false positives

This week has been a classic example of market complacency coupled with ‘buy the rumour, sell the fact.’

Source: Bloomberg

The state of play:

- The reaction in European markets to an ‘unknown’ Greek official’s announcement that Greece was drafting an accord coupled with Prime Minister Tsipras suggesting a solution was near is classic ‘buy rumour, sell fact.’

- The EU and IMF completely dismissed this suggestion was fact – yet Europe held the gains on the back of Tsipras and unknown official’s comments. The rumour mill out of Europe has seen markets reacting ‘positively’ every time to one of these ‘Greek deals’.

- The questions will be: when a deal is done (and it will) what will it look like? Will mass austerity continue to rain down on the Greek people? (Likely) Will the Greeks continue to repay creditors with the money they are lending to Greece? (Yes) And, what structural changes in Greece will be agreed upon to minimise these issue reigniting into the future? (Not many) – Sell the Fact!

- The Greek situation surely is the very definition of ‘kicking the can down the road’ – Yet markets have to be happy to jump up on any deal – Complacency 101

- US markets returned to complacency overnight - the positive prints in the US saw the VIX falling right back into the middle of the comfort band falling 5.6% last night to 13.27. (Anything inside the 10 to 14 range for the VIX is the market believing the current environment is basically ‘risk free’.)

- The Nasdaq is the interesting market to watch - it made a new record close last night – as AAPL move up again (AAPL also added 13 points in the DOW).

- A few PE stats to look at with the NASDAQ. The NASDAQ’s P/E in 2001 was 189.7 (dot com bubble). 2002: 41.9, 2005: 31.25. In 2011 its PE was cheap by its historical standards at 14.8. Over the last year, it has risen to 22.5 and currently trades at 22.96. So the Nasdaq price is elevated but nowhere near dot com days as the like of AAPL as EPS value.

- However if you strip AAPL out – the NASDAQ does look hot as social media plays and biotech remain elevated. Its and index to watch

Is the Australian market growthless?

- The preliminary construction index yesterday made for pretty bleak reading. 14 year low in construction activity with an 8.8% decline over the year and a 2.4% decline over the quarter.  

- If there is was a clearer example that the mining boom has ended it was engineering construction data falling 20.3% over the year, an all-time low, and looks completely devoid of growth. Residential construction did offset some of the decline in engineering up 11.4% over the same period. However, it is a long way off the monetary value engineering contributed to the economy.

- That brings us to today’s Private capital expenditure release – will future CAPEX expectations rise after the helping hand of two 25 basis point cuts?

- Non-mining remains the space all economist believe is the white knight for Australian spending. However, as yet it has not ridden in to rescue Australia’s growth profile from the collapse in mining spending.

- And don’t expect non-mining to ride in and rescue Australia’s below trend growth rate any time soon either. Expectations are for a 4% decline in 2015-16 investment year for non-mining to $56 to $58 billion. That is, however, a slight improvement from last quarter’s estimates if it’s true.

- Australia appears to be a growthless income market - a solid dividend yield market but not much else. It is why the ASX remains a funding source for global investors rather than an asset to invest in.

Ahead of the Australian open

We are currently calling the ASX 200 up 18 points to 5743. The SPI futures market has add 17 points to 5750 for the June close.


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