How Australia's falling house prices affect your equities portfolio

Welcome to Charts and Caffeine - Livewire's pre-market open news and analysis wrap. We'll get you across the overnight session and share our best insights to get you better set for the investing day ahead.

MARKETS WRAP

• S&P 500 - 3,647 (-0.21%)
• NASDAQ - 11,272 (+0.16%)
• CBOE VIX - 32.60
• USD INDEX - 114.19
• US 10YR - 3.955%
• FTSE 100 - 6,985 (-0.52%)
• STOXX 600 - 388.24 (-0.13%)
• UK 10YR - 4.524%
• GOLD - US$1629/oz
• WTI CRUDE - US$78.33/bbl

THE CALENDAR

US consumer confidence bounced significantly last month from 103.6 to 108, suggesting recession fears are being overplayed. The bounce came mostly from the fall in petrol prices stateside. Meantime, new home sales also surprised on the upside - with the US adding nearly 700,000 homes last month.

In Australia, it's all about monthly retail sales where the growth is expected to come down markedly. Analysts expect just 0.5% growth month-on-month but a negative print could provide traders with a rude shock. Overseas, tonight's quiet again bar some more central bank speak before Canadian GDP and US weekly unemployment claims. 

THE CHARTS

As today's report is housing-themed, we thought we'd bring you a housing chart and a stocks chart. The housing chart comes to us from Michael Blythe at PinPoint Macro Analytics (if you recognise the name, that's because he was Stephen Halmarick's predecessor as Chief Economist of the Commonwealth Bank). Their own housing model (and who doesn't have one at this point) suggests that an Australian house price bubble is receding - or at least not bursting in the way others have feared.

The idea is that prices have come back to near levels of the real residential price index, as calculated by CoreLogic and the Bank of International Settlements. Every time the green line has gone well past the pink trend band, it has resulted in a house price crash. This time is, following this logic, not different.

And now, the stocks chart. This one comes from Rudi Filapek-Vandyck of FNArena, and it makes for sober reading if you're a markets bull.

The chart suggests the one-day falls are much worse than even the best of the one-day rises. 

STOCKS TO WATCH

Normally, I write a cute introduction for this section. Today, I'm going to let Morgan Stanley write it for me:

House prices matter for Australian Equities as it is the key channel of focus for pivots in monetary policy and direction of travel for financial conditions. Our call for a 20% decline in National house prices will weigh on Equity Index levels and influence active positioning in the process.

Yes, that's right. Morgan Stanley has written possibly the best piece for the readers of this website - how the fall in house prices might affect the way you invest in equities. But first, we need to set the stage with their predictions:

1. They are calling for a 20% decline in house prices nationally
2. They are predicting e2023 GDP growth of 1.5%, thus avoiding a recession
3. They also revised their terminal rate forecast up to 3.6% (for the RBA)

And then - the money chart. If you're unsure whether house prices and equities have a correlation in this country, take a look at this:

As a result, the analysts are underweight these three ASX sectors:

1. Big Four Banks
2. Consumer discretionary stocks
3. Housing-linked stocks

See, I told you there was a link eventually!

THE QUOTE

The Bond Vigilantes are back. They were last active during the 1980s and early 1990s. They've been mostly lying low since then.

We can always trust Ed Yardeni for a quick quip about anything that's got a hint of bearish sentiment. This would be one of those examples.

Hans Lee wrote today's report.