Thankfully, after some $34 trillion in various stimulus programs from G10 governments, central banks and other entities have helped corner market participants to buy everything remotely resembling yield, as well as companies creating decent levels of cash flow, which have provided them the flexibility to return this cash to shareholders. A huge carrot for investors.
With both investment and high yield credit performing beautifully, companies could issue more and more debt over the years, altering their capital structure and ultimately buying back their own shares on issue, which for the large part created artificial earnings growth and supported equity markets. Companies are still buying back stock, but importantly that phenomenon has now partially shifted to one where we also see genuine organic earnings growth, assisted by the fact that global growth is running close to 4%.
While we are now in a situation where US and European institutional funds hold one of the lowest cash balances ever (they are all-in on this rally). Perhaps it’s no surprise to see that the biggest buyers of stocks have been the companies themselves, while in Japan and Europe we can say the central banks have also been a major player.
What the next ten years will look like - we have no idea, but it has been a crazy ride and one where central banks have had to literally make things up as they are going along! While inflation is still not where they would ideally like it to be and there are now many financial risks bubbling away in the background that need careful management, these central banks would be pleased with where we are now specifically in asset prices, employment and real growth.
With the ASX 200 having recouped 84% of the losses from the lows on 10 March 2009, it is fitting then that we are expecting a rally in today’s open, with SPI futures trading +24 points at 5912. Our call then for the ASX 200 sits at 5932 and again we focus on the year-to-date highs of 5956, although if we look into the various leads one questions where we are going to gain the inspiration to find 24 additional points from. Certainly, we have seen modest gains in the various US equity markets, as they close out what was a highly productive October, with outperformance (at a sector level) from tech, energy, and staples. Keep in mind that the S&P 500 has now closed higher every month of this year, except March, where the index fell a mere 0.04%, so this paints a clear picture. We have also seen good performance in US high yield credit overnight, which will naturally enthuse equity traders.
On the data side, we have seen a strong Chicago manufacturing print (at 66.2), which bodes well for tonight’s (1:00am AEDT) nationwide ISM manufacturing report, although the consensus is that this index grows at a slightly slower pace. We have also seen solid expansion in US house prices, while the consumer confidence index (October) printed 125.9 and the strongest levels since December 2000. There has been a limited reaction to the data in US fixed income, however, with small buying in the five-year Treasury and no move in the longer end of town, with the US ten-year anchored at 2.37%. In the interest rate market (Fed fund future), there has been small selling across the curve. Ultimately, we are left with an 83% chance of a December hike, although few are seeing opportunity in trading this meeting now and preferring to express a view in the implied moves through to end-2018 and 2019.
With little change in these markets, it’s no surprise then to see the USD index unchanged on the day, with a mixed performance in G10. Looking into the moves, the greenback has found sellers easy to come by against the GBP, while USD/JPY has rallied 60 pips or so. AUD/USD traded up a touch to $0.7693, into early European trade, but was sold through the US trade hitting a session low of $0.7640. Aussie data due isn’t likely to influence too greatly today and it’s all about the FOMC meeting here (tomorrow at 5:00am AEDT) and once that is out of the way, Donald Trump should announce the new Fed chair appointment, with Jerome Powell the now clear front-runner.
The Fed meeting is a small consideration for Aussie and Asia-based traders for the open, as is the fact that over the next two days we get Facebook and Apple. If we get good numbers here, then tech should drag US equities higher and could be the very reason why the ASX 200 trades to a new year high. That said, once this week of US earnings is out of the way, one still questions where the next upside catalyst is going to come from, with good earnings now firmly in the price.
Elsewhere, US and Brent crude prices are 0.5% higher, which should support, while in the bulks spot iron ore closed -0.4% at $58.52, while iron ore futures have seen more positive flow closing +0.9%. BHP’s ADR suggests the stock should open +0.9% higher.