A quieter end to a lively week

It’s been a mildly positive end to the week in equity land. However, the disconnect between bonds and equities continues to expand and the currency market is very much affecting the changing macro landscape.

Source: Bloomberg

What’s spiking my interest

  • Grexit - it is playing out like a Greek tragedy. If the political brinkmanship continues the way it is it is going and the threat of an Athens default ramps up substantially, investment sentiment is going to be trashed, making the current sell-off in continental bond markets look like child’s play.
  • The fact the IMF walked out of talks overnight and flew straight back to the States doesn’t help sentiment or give you confidence a deal will be done by 19 June. This will get messy.
  • US retail sales overnight were solid at 1.2% for May. After the ‘deep freeze’ figures from January to March, the thawing of consumer spending is another positive for the US economy and a further reason to believe in lift off from the Fed funds rate.
  • Jobless claims in the US also remain below 300,000 - another very solid positive which backs the non-farm payroll prints of the last six months.
  • The World Bank’s comments to ‘fasten seat beats’ on the Fed funds rate ‘lift-off’ scenario means emerging markets certainly need to be wary of this scenario and the possible short-term liquidity issues that could arise in the possible market frenzy.
  • Iron ore held gains and added a touch. Iron ore into Qingdao hit $65.62 – other five-month high. As I mentioned yesterday, this is the price level most believe the Chinese want it capped at.
  • The amazingly strong employment read – the employment rate at 6% and 56,000 jobs added in May (April was revised down to 13,700 jobs lost plus 42,000 jobs added in May reported). Female participation skyrocketed in WA, being the main ‘reason’ for the super print.
  • The employment numbers completely contradict the general consensus from the RBA to economists that employment is flat at best. I understand the statistical analysis is sound and the principles applied by the ABS are also statistically significant. However, a 60,000 person survey that is then extrapolated out to a population to 23.8 million may no longer meet requirements.
  • The Big 4 banks are becoming ‘less ugly’ on fundaments. As a group they are now trading at a 31% discount to industrial peers on a PE basis – the biggest gap in 10 years. This is the biggest spread between the banks’ gross yields to term deposit rates since the GFC at over 6%.
  • However, EPS estimates have turned negative for the first time in three years. Expectations are bad and doubtful debts are forecast to rise, ensuring the bond market drags. So the banks are ‘less ugly’ but not a screaming buy either.
  • Telcos (aka Telstra) - currently a full 1.1% under their 20-year historical yield at 5.1% versus 6.2% historical. Telstra is currently testing the $6 handle to the downside. This would be a complete change for the stock after being the ASX 200 darling of the past four years.

Ahead of the Australian open

We are currently calling the ASX down six points to 5550 but suspect a mildly flat finish to a positive week. Surprisingly, this will be the fourth positive week in the past eight.

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