Daily Market Reports | Feb 05 2014
By Greg Peel
The Dow rose 72 points or 0.5% while the S&P gained 0.8% and the Nasdaq recovered 0.9%.
The RBA’s easing cycle has come to an end, as is evident in the central bank’s monetary policy statement released yesterday. Another rate cut cannot be ruled out down the track were the Australian economy to fail to transition as hoped, but at this stage the chances are remote. The most likely outcome is that the next move, many months away, will be up.
The timing was a little unfortunate. On a different day, Bridge Street might have been heartened to hear the central bank thinks the economy is showing positive signs. But when the Dow falls 300 points and the ASX 200 is down around 90 on the open, you don’t want to learn the RBA is cutting off the support. There was a vague attempt at a recovery from the lows heading into the afternoon yesterday, but that evaporated when the statement hit the wires and the Aussie jumped a cent.
“The exchange rate has declined further,” Glenn Stevens noted in the statement, “which, if sustained, will assist in achieving balanced growth in the economy”.
This is a stark turnaround from the frustrated commentary of months past, including December’s:
“The Australian dollar, while below its level earlier in the year, is still uncomfortably high.”
And as late as December, the central bank was still offering up the possibility of another rate cut:
“The Board will continue to assess the outlook and adjust policy as needed to foster sustainable growth in demand and inflation outcomes consistent with the target.”
But after a bit of sun and a few pina coladas over the break, Glenn has had a change of heart:
“In the Board's judgement, monetary policy is appropriately configured to foster sustainable growth in demand and inflation outcomes consistent with the target. On present indications, the most prudent course is likely to be a period of stability in interest rates.”
While some sectors of the economy may be disappointed by the news, they should be comforted that stability is a good thing. Stability implies a lack of uncertainty, and uncertainty is the economy’s, and the stock market’s, enemy.
The question now is: Are we having a correction or are we not having a correction? The “definition” of a correction is 10%, but that’s just semantics. Nevertheless, occasional corrections are deemed healthy for a bull market in order to prevent bubbling and keep valuations sensible. We haven’t had one now for too long, which is why many in the market are welcoming the current weakness. The S&P 500 as at Monday night’s close was down 5.8% from its December 31 all-time high, while on yesterday’s close the ASX 200 was down 4.7% from the October 28 post-GFC high.
The answer is no one knows just yet. Last night’s partial recovery on Wall Street suggests there are buyers around, but the US earnings season is not over yet, tapering and its ramifications have only just begun, and on Friday there’s another jobs number. In Australia, the RBA has pulled stumps and we are only just starting our own earnings season. Anything could happen and quite possibly will.
Last night’s US data release was December factory orders. They fell 1.5% but a fall of 2.0% was expected. After a raft of misses on Monday night, last night’s major earnings releases were on the positive side. Handbag retailer Michael Kors jumped 18% and US health food chain Yum Brands (KFC, Pizza Hut) rose 8%.
So there was a little bit of impetus for a bounce. The US ten-year bond yield also bounced back 4 basis points to 2.62% and the VIX fell back 13% to 18.7. The US dollar index was up 0.1% to 81.14 while gold was steady at US$1255.00/oz.
The big mover over 24 hours was the Aussie, up a whopping two cents to US$0.8936.
Base metals all bounced back a little and West Texas rose US95c to US$97.38/bbl, while Brent fell US18c to US$105.98/bbl.
If we’re in for a recovery on Bridge Street today, it won’t be based on a 3 point gain in the SPI Overnight.
It’s service sector PMI day today, with Australia, China (HSBC), the eurozone, UK and US all reporting. Tonight the ADP private sector jobs number is due in the US.
Echo Entertainment ((EGP)) is today’s local result highlight.
Rudi will appear on Sky Business at 5.30pm.
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