Daily Market Reports | Feb 04 2015
By Greg Peel
The Dow rose 305 points or 1.8% while the S&P gained 1.4% to 2050 and the Nasdaq added 1.1%.
“For the past year and a half, the cash rate has been stable, as the Board has taken time to assess the effects of the substantial easing in policy that had already been put in place and monitored developments in Australia and abroad. At today's meeting, taking into account the flow of recent information and updated forecasts, the Board judged that, on balance, a further reduction in the cash rate was appropriate. This action is expected to add some further support to demand, so as to foster sustainable growth and inflation outcomes consistent with the target.”
The debate is over, the RBA has cut. Not everyone was sure the board would make the move, given the higher than expected underlying CPI result and the substantial devaluation of the Aussie since the last meeting, but then forex and money markets had largely built in such an expectation. When the Aussie ten-year yield fell below the RBA’s cash rate last week, it was a reasonable signal.
Glenn Stevens’ statement actually gave a nod to the very low, oil-related headline CPI number posted in the December quarter, and suggested that while labour costs remained subdued, so too would inflation. While lower energy costs would support the Australian economy, they would also reduce income (from energy exporters), and thus on balance the board believes economic growth will remain “a little below trend” for longer and unemployment would peak “a little higher” than earlier expected. The Aussie has come off hard against the US dollar, but not so much against a basket of trading partner currencies, the board noted.
Add that all up, and the rate has been cut to 2.25% from 2.50%.
I asked the question yesterday whether the local rally really had another 40 points in it, as the futures were suggesting, and well, it had twice that. But all after 2.30pm. We saw a combination of the ongoing recovery rally in energy (4.1%) and materials (2.4%) combined with renewed demand for the high-yielding telco (2.1%) and the banks (1.5%). A perfect upward storm of sorts.
Despite having fallen to a level which suggested the anticipation of an RBA rate cut, the Aussie plunged further on the news yesterday, from around 78 to 76.5. Markets closed locally on the assumption this was the new post-cut level but this did not last long in overseas sessions. Indeed, the Aussie is back where it was before 2.30pm yesterday, at US$0.7808 – unchanged over 24 hours.
We can argue that the recent sharp fall to 78 from 81 already priced in a rate cut, but we can also look to the US dollar index last night which fell a full percent to 93.57. The fall in the dollar index reflected a 1.3% recovery surge in the euro.
The surge in the euro, from the depths it has plumbed post ECB stimulus announcement, is all to do with Greece. Far from worrying about a “Grexit”, following an unresolved stand-off between the new Greek government and its EU-IMF creditors, the market was comforted last night when the Greek Finance Minister, Aussie Yanis, backed away from insisting on a debt write-off and instead spoke of a possible debt swap.
The world breathed a sigh of relief.
Meanwhile over in the market du jour, last night saw the oil price rebound shift into another gear. West Texas jumped US$3.28 or 6.6% to US$52.69/bbl and Brent jumped US$3.23 or 5.9% to US$57.72/bbl. Given WTI traded down to just above US$43 only last week, we’ve seen around a 25% rally in oil in a heartbeat.
Those who had begun to suggest oil had become oversold last week are now suggesting the rally is overdone this week. The rebound seems to be reflective of ongoing short-covering, combined with a “not missing out” trade, spurred by the big drop in US rig-count last week, and ongoing talk of capex cuts, jobs losses and strikes in the US oil industry (and the big fall in the greenback last night). Yet on the wider picture of global demand-supply, in the nearer term, a weak oil price is justified, they argue.
We shall have to let the dust settle, at some level.
Speaking of short-covering, the drop in the greenback broke the dam on the copper price last night. Copper spent 2014 as the commodity (some) analysts loved and the market clearly hated, but last night it surged almost 4%. The other base metals were mostly 1% higher.
And finally there’s been some respite for iron ore, which rose US70c to US$62.00/t.
The rally in oil and the news from Greece are being cited as the drivers of the 300 point rally in the Dow last night, and for an 11 point rebound in the US ten-year bond yield to 1.78%. Gold’s US$18.00 fall to US$1261.70/oz is no doubt also Greece-related.
Yesterday the ASX200 hit a new post-GFC, seven-year high of 5707. Overnight we’ve had oil up again, copper up, iron ore up, Wall Street up big time, but also the Aussie back to where it was. So what is the futures market predicting this morning? The SPI Overnight closed up 97 points or 1.7%.
It’s services sector PMI day across the globe today, and the US private sector jobs report for January is out tonight, ahead of Friday’s non-farm payrolls.
Echo Entertainment ((EGP)) is today’s early season earnings reporter.
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