Good afternoon,

In the paradoxical world of global markets right now, US non-farm payrolls beat expectations and risk assets sell off. ASX200 down over 1% today, though we are still up 0.44% on this time last week, 6677pts currently.

On the whole, the week was about a defensives rally, bond yields down, long duration stocks up but with a more defensive tilt (property, infrastructure over tech) than similar times in recent history.

Bond yields inverted with ASX200 Property Index below.

For mine, that’s a sign that the market is starting to get bit more concerned about the macroeconomic data…. as I’ve said for the past few weeks… central banks easing monetary policy at this point is not a positive sign.

Below, I’ve put the year on year percentage change in earnings and total return, on the ASX All Ordinaries excluding resources companies (as short term supply issues are propping-up iron ore miners).

What you see is back in 2015 we had a syncronised decline in returns and earnings estimates, a recovery in 2016 and 2-years of positive, moderate returns and earnings revisions between 2016 and mid-2018.

Fast forward to today, we’ve seen a steady erosion in earnings expectations whilst prices have jumped. Is this the market pricing in likely earnings growth? Are analysts about to revise up their earnings forecast and justify the lofty prices?

I don’t think so….
Why? Well let’s look at our lead indicators… US Manufacturing PMI/ISM…

Citi economic surprise index

Gold price – USD $1400

Volatilty index at recent lows… quant funds will be max long already with markets trending higher and volatility at 13. This can unwind quickly if central banks baulk at lower rates, the G20 doesn’t go so well or European banking system faulters.

There’s a few bulls still out there though. Citigroup strategists see earnings expectations as too low for the upcoming US quarterlies, with negative-to-positive pre-announcements above average (see below chart)

This is all in spite of expecting weak forward-looking guidance from management teams, they seem to think a challenged quarter is well and truly priced.

Personally, I don’t agree. I think MS are closer to being correct. In their global macro research they talk about the idea that bad data should be feared, easy monetary policy is nothing to be excited about and recant that in the last 30 years, “when easier policy collides with weaker growth, the latter usually matters more for returns. Easing has worked best when accompanied by improving data.”

I could be wrong. The data could bounce into falling rates and markets scream higher. But I find it difficult to see that happening given the slope of the yield curve, inflation expectations and already elevated commodity prices. Going into reporting season, I’m treading carefully.

Aussie House Prices
A few news stories from the weekend caught my eye about housing. First, in the Australian (paywalled) I read that APRA will allowed lowered the banks hurdle requirements from 7% to 2.5% over the standard variable rate. This means the banks can lend more money to homebuyers and should boost appetite for residential property.

The second, widely reported, was the surge in clearance rates – 78.2% in Sydney and 70.3% in Melbourne.

The rates of decline look like they’ve slowed. Price still going down, but slower than before.

Movers & Shakers

Nufarm rallied on takeover speculation, Afterpay and Zip both bounced, Ooh! Media (OML) and a few other underloved value names caught a bid.

Speedcast’s worries continue. HUB shorts getting more confident. Nice pairs trade opportunity playing out with short HUB, long PPS.

Have a good week,