The Overnight Report: RBA Rattles Wall Street

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By Greg Peel

The Dow closed down 140 points or 0.8% while the S&P lost 0.9% to 2063 and the Nasdaq fell 1.1%.

Shock!

The RBA delivered a “shock” rate cut yesterday afternoon, apparently, due to the latest CPI data signalling “deflation”. At least those were the mass market headlines.

Actually it was a 50-50 chance, and it is clear from Glenn Stevens’ statement the disinflation experienced in the March quarter concerned the board enough to make the move:

“Inflation has been quite low for some time and recent data were unexpectedly low. While the quarterly data contain some temporary factors, these results, together with ongoing very subdued growth in labour costs and very low cost pressures elsewhere in the world, point to a lower outlook for inflation than previously forecast.”

Media commentators may now like to go and look up the definition of deflation.

The statement again made a passing reference to a strong Aussie dollar potentially “complicating” Australia’s economic transition but “remarkably” accommodative monetary policy around the world was clearly a factor behind cutting. And “critical” to the decision was the impact felt in housing investment by tighter lending regulations, which provided the central bank with sufficient breathing space.

And didn’t the stock market love it.

Before the opening bell, ANZ Bank ((ANZ)) posted its first drop in profit since the GFC and cut its dividend. Computers sold down the stock 4% from the open. But very quickly the banks, including ANZ, were back in the green. We might put this down to (a) they were all sold off the day before, (b) ANZ’s dividend cut was not totally unexpected, (c) the market is positive on ANZ’s restructure and more prudent approach, and (d), short positions in the banks were the highest they’ve been since 2011 heading into this week.

By late morning the ASX200 was up 50 points, with buying in the banks a significant driver. The market then settled and waited. At 2.30pm, bang!

Zeroes one day, heroes the next. The ultimate 3% jump in the financials index yesterday was the major driver of the 2% rise for the index. The interesting point here is that in order to make money, banks need interest rates to go up, not down. But lower rates do take the pressure off the recent rise in bad debts which has impacted on bank earnings.

Other sector moves were more straight forward. The yielders, telcos and utilities, and consumer discretionary, which benefits from more money in punters’ pockets, each rose over 2%. The offshore earners, which benefit from a lower Aussie, drove healthcare and industrials up over 2%. The cut is a mild positive for consumer staples, which rose 1%, while the resources sectors watched from the sidelines. Energy was actually down 0.7% on a lower oil price.

And how about that Aussie? Over 24 hours it’s down a full 1.8 cents to US$0.7485 having experienced a two-step plunge. The first cent was on the rate cut, while the balance was a result of the US dollar having a much anticipated rebound last night.

But now that the euphoria has subsided, how will Bridge Street far today? The SPI Overnight is down 63 points. Oil is down, iron ore is down, base metals are down and Wall Street is down.

At least last night’s pre-election “safety” budget will have little impact.

Aussies in the mix

Nobody much noticed on Bridge Street yesterday but Caixin’s China manufacturing PMI for April showed a drop to 49.4 from 49.7 in March when 49.8 was forecast. Wall Street noticed, and China was on the list of concerns that sent the US indices lower last night.

Oil was lower, as reality continues to sink in with regard global production, while the US dollar index is up 0.5% to 93.00, stalling the currency story. These were three reasons cited for weakness on Wall Street last night.

The fourth was the RBA rate cut. It’s not that the world has recently decided the RBA has the power to move global mountains, it’s simply a matter of global sentiment.

Ever since the GFC, global stock markets have applauded every increase in central bank stimulus. But when the BoJ moved Japanese rates into the negative this year, there was a tangible shift in sentiment. Where is this currency war leading to? With the yen firmly stronger and the Nikkei weak, the BoJ is expected to have to move again. With the euro stubbornly strong, and the ECB just having reduced its inflation forecast, Mario Draghi is expected to have to continue with “whatever it takes”.

Now one of the world’s favoured carry trade destinations, the reliable, commodity-driven high yield economy of Australia, has been forced into joining the war. Clouds are gathering.

The US ten-year bond yield fell 7 basis points to 1.8% last night.

It all comes back to the Fed. But until the Fed can find any cause to hike again, there is no end in sight. The US economy grew by only 0.5% (year on year) in the March quarter.

Commodities

The US dollar index is up half a percent following a persistent drop. That’s enough in itself to send commodity prices south.

On the creeping reality of ever growing OPEC production, West Texas crude is down US$1.01 to US$43.88/bbl and Brent is down US$1.35 to US$46.75/bbl.

On the weak China manufacturing numbers, and bear in mind the LME was closed on Monday night, aluminium, copper, lead and zinc are all down over 2%. Nickel and tin were spared.

Iron ore is down US$2.70 to US$62.50/t.

Gold is down US$5.20 at US$1285.70/oz.

Today

The SPI Overnight closed down 63 points or 1.2%. Chartists have long been anticpating the 5350-5400 range as a target for the ASX200. Yesterday we hit 5353.

Australia’s service sector PMI is due today, and tonight sees the same in the US, along with the private sector jobs number for April.

Dexus Property ((DXS)) will issue a quarterly report today and several AGMs will be held, including those of QBE Insurance ((QBE)) and Santos ((STO)).

May the fourth be with you.
 

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