MARKETS SPECTATOR: The House doesn't always win

Forget earnings, say traders and analysts, the market’s gains are underpinned by a yield differentiation that continues to favour stocks. It is now about 1.2 per cent. But Matt Sherwood at fund managers Perpetual forecasts the yield differentiation may rise to 1.5 per cent if the Reserve Bank cuts the cash rate, currently at 3 per cent.

March new home sales and April house price data today are likely to be soft. That will be further evidence the Reserve Bank needs to trim rates, says Sherwood. Meanwhile, Nomura’s Tim Rocks says the Reserve Bank’s strategy to bolster the household sector has yet to meet success. That may mean the central bank may be forced into more aggressive rate cuts to fill the slide in mining spending and activity that has propelled the Australian economy forward over the last 12 years. That is good news for stock market investors.

But Rocks warns that investors who are ‘front running’ central bank rate cuts are on a ‘fool’s errand.’ Not only in Australia are economic statistics soft but data from China is expected to show its economy is slowing. Forecasts for China’s PMI Manufacturing Index number for April are an average 50.7 versus 50.9 for March. European unemployment is now at a fresh all-time high for March, 12.1 per cent. There are signs US manufacturing has stopped expanding in a fragile economic recovery.

Moreover, Rocks and Sherwood expect earnings downgrades for Australian companies in coming weeks. Rocks terms May as ‘confession season’ for companies. He expects many to issue earnings warnings for the 12 months to June 30. “The market is positioned for an earnings recovery and I’m not sure that will occur,” Rocks says.

ANZ Bank and Tabcorp’s earnings reported this week are stock specific and give little comfort for earnings for the whole market, traders and analysts say. ANZ’s first half cash profit increase of 10 per cent was the result of cost cutting, says one trader. The stock is benefitting from ANZ chief Mike Smith’s commitment to increase the payout ratio to investors in the form of dividends to 70 per cent of earnings. Similarly Tabcorp’s 2.6 per cent increase in revenue in its third quarter to $480.3 million proves gambling is imperious to the broader economy, the trader says.

Are stock market investors still in a gambling mood?