This won’t be good for Australia’s banks

Thursday, 31 October 2019
Adelaide, Australia
By Bernd Struben

  • Let the good times roll
  • Happy Halloween!

Yep. The US Fed cut interest rates again. As expected.

We’ll have a look at how markets reacted, and what was said and left unsaid below.

But first…

Are they slipping something into the water in Melbourne?

It’s the only explanation I can come up with for the over-the-top behaviour — to put it kindly — of the climate change extremists trying to shut down the International Mining and Resources Conference.

Now everyone has the right to voice their opinion and gather to protest. But that doesn’t open the door to intimidating and spitting on conference presenters and attendees.

To give you some idea of the mindset involved, here’s a snippet from the reader comment section of today’s Age:

The government has welcomed the leaders of some of the world’s most arguably violent corporations to Melbourne for their conference.

Wow. It’s as if they’d greenlighted an ISIS convention.

Had the protesters bothered to check the agenda, they might have noted numerous presenters discussed their growing concentration on environmental, social and governance (ESG) criteria. That included a panel discussion with the World Gold Council, Newcrest, and OceanaGold.

The panel’s focus?

Sustainability and the steps they’re taking to reduce their environmental impact.

Anyhow…

Several of my colleagues are at the mining conference. Always looking for clues that could point to a stock’s next big run higher. Fortunately, none of them were hit with activist spittle.

I did get this email from Shae Russell, editor of The Daily Reckoning Australia:

They’re all holding signs out the front of the mining conference saying to shut Adani down. It’s *almost* like they don’t realise that other stuff comes out of the ground…like all the minerals in their phones they held up to record me and others walking in.

Good point Shae. Not to mention the materials used to produce their bicycles and power the public transport they undoubtedly took to get to the protest site. Surely none of them drove…right?

Speaking of important materials, this is an opportune time to review Australia’s most valuable exports.

From the website, World’s Top Exports:

In 2018, Australia’s most valuable exported products were coal, iron ores or concentrates, petroleum gases, gold, aluminum oxide and hydroxide, crude oil, copper ores or concentrates, frozen beef, aluminum then wheat…’

Erm. Awkward memo to climate protesters…

Australia’s top seven revenue earning exports are all mined by the folks you’d like to put out of business. And you’re probably none too thrilled about number eight either…beef. Flatulent cattle, we’re told, are major contributors to global warming.

Which leaves us with…wheat!

Now, to the markets…

Markets

Overnight, the Dow Jones Industrial Average closed up 115.27 points, or 0.43%.

The S&P 500 closed up 9.88 points, or 0.33%.

In Europe the Euro Stoxx 50 index closed down 1.80 points, or 0.05%. Meanwhile, the FTSE 100 gained 0.34% and Germany’s DAX closed down 29.39 points, or 0.23%.

In Asian markets Japan’s Nikkei 225 is up 43.94 points, or 0.19%. China’s CSI 300 is up 0.10%.

In Australia, the S&P/ASX 200 is down 31.48 points, or 0.17%.

West Texas Intermediate crude oil is US$54.98 per barrel. Brent crude is US$60.61 per barrel.

Turning to gold, the yellow metal is trading for US$1,495.51 (AU$2,167.41) per troy ounce. Silver is US$17.86 (AU$25.88) per troy ounce.

And bitcoin continues to slide following the bounce it received over the weekend from Xi Jinping’s ‘embrace the blockchain’ comments. One bitcoin is worth US$9,160.28.

The Aussie dollar is worth 69.00 US cents.

Let the good times roll

Getting back to the latest rate cut from the world’s most watched central bank…

It comes with US unemployment figures at 50 year lows…and stock markets at record highs.

Let the good times roll.

The 0.25% cut brings the federal funds rate down to the 1.50–1.75% range. That’s far from the negative rates Trump’s been demanding. But it was enough to see all the major US indices close higher.

The one day chart of the Dow Jones below is a good reminder of the power of the Fed. And just how reliant stock prices have become on easy money.



chart image
Source: Google Finance
Click to enlarge

I’ve marked 2:00pm (US Eastern time) on the chart. That’s when the good news from Fed Chair Jay Powell came out.

Up until that point the Dow was in the red, down 0.23%. Following the news the index rallied 0.52% by the closing bell.

Now that’s not a massive rally. But then as I explained yesterday, a rate cut was all but priced into the markets already. Had the Fed instead held the line, stocks would have taken a sharp tumble.

Animal spirits were also dampened by Powell’s post cut proclamation that, ‘monetary policy is in a good place’.

That shouldn’t come as a surprise to you. Here’s what I wrote in yesterday’s Insider:

Powell may offer some modestly hawkish forward guidance. Meaning he’ll leave investors wondering if his latest rate cut could be the last, barring any major economic downturn.’

And here’s what Powell actually said:

We see the current stance of monetary policy as likely to remain appropriate as long as incoming information about the state of the economy remains broadly consistent with our outlook.

So we shouldn’t expect any more cuts from the Fed in 2019.

As for 2020?

I reckon by then the debt fuelled economy and stock markets will be in serious need of another sugar hit. Or two. Just to calm the nerves. Just to help everyone through the year.

If the official US rate does fall to 1.00% it will spell more bad news for Australia’s big banks.

That’s because the RBA will have little choice but to follow suit and cut Australia’s cash rate from the current record low 0.75% to a new low 0.50%.

In fact, yesterday’s cut from the Fed may already be forcing RBA Governor Philp Lowe’s hand. That’s because as US rates fall, the Aussie dollar tends to gain ground. Following the Fed’s cut yesterday, our dollar hit a three month high of 69.2 US cents.

A strengthening dollar makes imports cheaper, but it makes Australia’s exports more expensive. Hence the RBA may have little choice but to play along with the global rate cut game.

And as we looked at in yesterday’s Insider, ultra-low interest rates pose one of the biggest threats to traditional banks. Along with their reluctance to embrace the technology revolution.

The silver lining for you as an investor is that a host of young upstarts are lining up to take a slice of the big banks’ business. Some of these upstarts will undoubtedly fail…and take investors’ money down with them.

But a select few could go from obscurity to household names in what market veteran Ryan Dinse calls ‘the great bank unbundling’.

Ryan has run his slide rule across the field of small-cap, tech savvy competitors. And he’s convinced he’s narrowed that field down to four stocks with sky-high potential.

You can find all of that here.

On an entirely different note…

Happy Halloween!

Before signing off, a nod to all those little ghosts, fairies and superheros braving the heat in their oft stifling costumes. (It’s 37 degrees here in the Adelaide Hills today.)

The chocolates may melt in their treat bags. But these are community engaging evenings they’ll remember fondly for life.

Now the origins of Halloween date back centuries before Europeans set foot in what’s now the US. But Americans, as they’re wont to do, made it into the huge commercial event we know today.

Growing up in the US, there was no question of whether or not to celebrate. Carving the pumpkin with the family and scooping the goop from its ‘skull’. Putting on a Planet of the Apes mask (yep, this was the ‘70s). And knocking on your neighbours’ and strangers’ doors. Not just to ask for treats, but also to show off your cool or scary outfit to the whole neighbourhood.

And like a good Hollywood blockbuster, Halloween has caught on across the world. Though not everyone is happy about that.

Some label it pagan. Others decry the truckload of sugar handed to kids. But mostly people like to gripe that it’s just an ‘American thing’.

That’s true…partly.

Though if you’re prone to shun all things American you’ll want to edit Santa Clause and his reindeer out of your next Christmas holidays. Like Halloween, the Christmas tradition far outdates modern US history. But ‘twas the Americans who devised the modern Santa.

And the Easter Bunny.

And pretty much every superhero or magical princesses you may see the kids dressed up as this evening.

If one of those kids comes knocking at your door, have a treat ready for them. Even — yuck — a healthy one. And be sure to compliment their costumes. They’ll love you for it.

On a final, final note…I’ve lined up a special guest editor for tomorrow’s Port Phillip Insider. Check back in for the latest trading tips and market insights from Alpha Wave Trader’s Murray Dawes.

I’ll be back with you on Monday.

Cheers,
Bernd