Daily Market Reports | Jul 06 2016
By Greg Peel
Hitting Home
The concluding paragraph of the RBA’s monetary policy statement last month read:
“Taking account of the available information, and having eased monetary policy at its May meeting, the Board judged that holding the stance of policy unchanged at this meeting would be consistent with sustainable growth in the economy and inflation returning to target over time.”
Yesterday’s new statement made the following statement with regard Brexit…
“Any effects of the referendum outcome on global economic activity remain to be seen and, outside the effects on the UK economy itself, may be hard to discern.”
…and then concluded as such:
“Taking account of the available information, the Board judged that holding monetary policy steady would be prudent at this meeting. Over the period ahead, further information should allow the Board to refine its assessment of the outlook for growth and inflation and to make any adjustment to the stance of policy that may be appropriate.”
This conclusion points more to the possibility of an August rate cut than the June statement did. Glenn Stevens, like everyone else, has no idea how Brexit will play out but the central bank is ready to respond. The RBA statement did not, however, offer any joy to the local market yesterday.
On Monday the local market appeared to shrug off the possibility of a hung parliament and focus more on stronger commodity prices. Yesterday saw a sharp reversal however, which may reflect the possibility of fiscal stalemate hitting home in a delayed reaction, but I’d hazard a guess and suggest what we saw was foreign selling following the US long weekend.
Selling was relatively even across sectors, with the banks understandably among the leaders with a 1.3% fall while 0.5% for materials reflected an offset from stronger iron ore and gold prices. Utilities was the only sector not to fall, given its attraction as a bond proxy, while the leading 1.9% fall for consumer discretionary had an additional local feel to it.
The ASX200 fell steadily in the morning and had basically reached its closing level by midday, with no late cavalry appearing. No RBA rate cut had been expected, so there was no response to the statement release in the afternoon. The Aussie saw a choppy session before offshore movements took over last night.
There is little doubt the Australian economy is facing a new source of uncertainty in the form of a non-government, but that’s nothing compared to ongoing uncertainty in Europe.
Banking Crisis
The Bank of England last night relaxed regulatory requirements on the UK banking sector and thus effectively released 150bn pounds of new lending to businesses and households. But this did nothing to stem the ongoing fall in UK bank shares. The FTSE 100 actually closed 0.4% higher last night but as is now oft noted, the 100 contains big multinationals such as mining & energy and pharma stocks, as well as banks, and these benefit from the lower pound.
Bank shares fell again on news overwhelming cash outflows from UK commercial property REITs had forced the suspension of redemptions from some funds. But the focus was not just on the UK, but on Italy.
Big falls in EU banks stocks post Brexit have brought into focus the parlous state of the Italian banking system, where non-performing loans are running at some 17% — ten times more than in the US. The world’s oldest bank, Monte dei Paschi, has stuck its hand up for a bail-out but there is a problem.
As of this year, new “bail-in” rules have been in place in the EU. These prevent any direct EU injection of bail-out funds ahead of bank bondholders taking a haircut on the value of their holdings, thus reducing the bank’s interest cost as an inside form of bail-out, or “bail-in”. But the issue here is that most of the bondholders of the likes of Monte dei Paschi are mum & dad investors, not global hedge funds or sovereign wealth funds.
Italy is thus calling for exemption rules to be triggered with regard bail-in, as is allowed in the case of a “systemic event”. Is the Brexit vote a “systemic event? Germany says no. Forget about the Netherlands being the next in line. Talk is now of “Italeave”. No doubt freelance exit consultant Nigel Farage will stick his hand up as an advisor.
The Italian bank sector is down 50% post-Brexit. Last night the French stock market fell 1.7% and Germany 1.8%.
European selling flowed into Wall Street as US traders also dealt with a 4% drop in the oil price. If Brexit jitters are not alone sufficient to spook the oil market, ongoing falls in the pound and euro had the US dollar index up last night by 0.8% to 96.22, and there is renewed concern of US supply ramping up again now WTI has seen US50/bbl once more.
Wall Street has seen a complete Brexit rebound, so last night traders were suggesting a hundred point drop for the Dow is hardly surprising given uncertainty still reigns and is there is little reason to suggest this won’t impact on the US, albeit the US looks ever more like a safer place to invest.
On that note, last night the US ten-year bond yield fell 9 basis points last night to a new record low of 1.37%.
Commodities
West Texas crude is down US$1.87 or 3.8% at US$46.86/bbl.
Uncertainty and the stronger greenback hit base metal prices, with copper and lead down 1% and nickel plunging 5%.
Iron ore fell US10c to US$55.80/t.
Gold is up US$5.60 at US$1356.20/oz. While few disagree gold is the safe haven du jour, in US dollar terms it is fighting a very strong headwind.
The good news is the Aussie is down 1% at US$0.7462.
Today
The SPI Overnight closed down 19 points or 0.4%. There is likely some consideration here that yesterday’s trade on Bridge Street was ahead of last night’s trade offshore.
The minutes of the June Fed meeting are out tonight, which will include a nod to Brexit risk being a reason not to raise. But as the meeting was held pre-Brexit, relevance will be limited.
Rudi will be presenting in Melbourne today, plus participating in the first Evening With Rudi with local FNArena subscribers.
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