S&P500 Reaches New All-Time High, Commodity Prices Gain On Global Stimulus Optimism, BOE Rate Decision Thursday In Spotlight, ASX SPI200 Futures Up 30 Points

The S&P500 rallied for a third straight day on Tuesday gaining +0.70% to move to a new-all time high at 2,152.14 while the Nasdaq100 extended its recent rally to five days closing up +0.50% to be at the highest levels since December 2015. There was no notable news overnight, with buying likely coming on optimism from new all-time highs as well as the prospect of further global stimulus and delayed rate hike expectations in the U.S. We are now entering the second quarter U.S. earnings season where expectations are for around a 5.5-6% decrease in earnings, delayed interest rate hike expectations are continuing to provide a floor under equities recently however any surprises to the upside for earnings have the potential to lift benchmark indexes even higher.

Commodity prices made significant gains overnight, partially due to a weaker US Dollar index which closed down -0.05% but perhaps more significantly so on expectations of further stimulus from central banks as well as governments such as Japan where new stimulus measures are expected to be announced imminently. Both WTI & Brent crude oil gained +4.56% & +4.13% respectively as a survey from Bloomberg suggests U.S. crude oil supplies likely dropped by 3 million barrels last week. Elsewhere copper gained +2.98%, as did natural gas +1.18% while Iron Ore posted the largest gains up +6.45%. Unsurprisingly with risk assets being bid up spot gold & silver, which are seen as safe haven assets, fell -1.65% & -0.53% respectively.

European benchmarks were also broadly higher on Tuesday as German CPI (YoY June) came in as expected at 0.3%. The Euro Stoxx 600 gained +1.06% as did the DAX30 up +1.33% while the Euro closed relatively flat against the US Dollar up +0.02%.

The British Pound gained +1.95% following the announcement Theresa May will become the next U.K. prime minister avoiding up to nine weeks of political uncertainty while minutes from Bank of England meetings from June 28th & July 1st helped reassure investors the BOE stands ready to act further if necessary following the reduction of the counter cyclical capital buffer for banks from 0.5% to 0%. The FTSE100 which is more exposed to movement in the Pound was relatively flat, down -0.03% while the FTSE250 which is more domestically focused closed +0.60% higher.

The Bank of England will meet on Thursday to decide on monetary policy with the probability of a rate cut based on overnight index swaps suggesting an 80% chance of a rate cut which then increase to 89% for the early August meeting. The case can easily be argued for a rate cut on Thursday with the BOE acting pre-emptively to offset any effects from the Brexit, however it would also be doing so without key data such as inflation and unemployment due out next week suggesting they may wait to asset the data before acting in early August.

Inflation and unemployment data out next week is for the month to month change between May and June which would not capture the effects following the referendum, although it would include any effects caused by the uncertainty leading up to the vote. The BOE may not have the necessary data by the early August meeting either with inflation and unemployment for July not released until mid-August suggesting if this was the case they could wait until September 15th before acting. For this reason I view the more likely scenario of a rate cut on Thursday’s meeting.  

Asian equities also gained on Tuesday led higher by the Nikkei 225 which closed +2.46% stronger as the Yen fell -1.97% on expectations of further stimulus from Prime Minister Shinzo Abe. News agency Nikkei has reported that stimulus measures could be up to 10 trillion yen (US$90.7 billion). The chart below highlights the USDJPY which has gained roughly 4.36% over the past two sessions following falls as much as 17.68% in 2016 dragging the Nikkei 225 index along with it. The appreciation through 2016 in the Yen has provided significant headwinds for the BOJ & Prime Minister Abe as they try to stimulate the economy and increase inflation towards 2%  as we have seen recent deflation with prices falling -0.4% year on year in May.

Locally the ASX200 climbed +0.3% on Monday with Basic Materials and Technology leading gains as the Australia dollar appreciated +1.14% reflecting a risk on mentality globally. Meanwhile the market looks set to extend the recent rally to five days with ASX SPI200 futures up 30 points in overnight trading. If you’re interested in trading global markets and still need practice, click here to open a free $100,000 Rivkin Trader account. 

Data releases:

·         Westpac Consumer Confidence Index (MoM Jul) 10:30am AEST

·         Chinese Loan Growth (YoY Jun) 11:00am AEST

·         Chinese Trade Balance (YoY Jun) 5:00pm AEST

·         Euro-zone Industrial Production (YoY May) 7:00pm AEST

·         U.S. Import Price Index (YoY Jun) 10:30pm AEST

·         Bank of Canada Rate Decision 12:00am AEST

·         U.S. Crude Oil Inventories (Jul 8) 12:30am AEST

·         Federal Reserve Beige Book 4:00am AEST

Source: Rivkin, Bloomberg

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This article was written by James Woods - Global Investment Analyst, Rivkin Securities Pty Ltd. Enquiries can be made via info@rivkin.com.au or by phoning +612 8302 3600.

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