Stocks wander, bonds rally, oil tumbles: Equity markets edged higher overnight, however activity was generally thin, as fresh news and data proved lacking. Market behaviour suggests global growth concerns have returned to prominence: bond yields fell across the globe, with the yield on the benchmark US 10 Year Treasury note falling below 2 per cent again. Defensive sectors generally outperformed on Wall Street. Oil tumbled, while gold staged a bounce. And the USD was a little weaker, though it was somewhat supported by mixed trading in the Euro, which sold-down on news that Christine Lagarde would be the next head of the European Central Bank.
The RBA’s optimistic cut: The RBA met yesterday and cut interest rates to a new record-low of 1.00%. It was what the market participants had been expecting. However, as the sheen of the initial announcement wore off, the detail in the RBA’s accompanying statement was probably a touch “less dovish” than what was expected. The ASX200, led by a tumble in bank shares, sold-off as the meeting’s details were digested, erasing much of the day’s gains. The dynamic also lead to a minor lift in the Australian Dollar, as traders very slightly their pared bets on the imminence of the RBA’s next cut.
The pros and cons: Characteristically, a cautiously optimistic tone was adopted by the RBA in their press release. They continued to run their line that the Australian economy is in a positive enough position, but a rate cut is required to support the absorption of “spare capacity” in the labour market. The RBA also talked-up, in light of this, the economy’s inflation prospects, suggesting that it would return to target next year. To be clear, the RBA weren’t all sunshine and rainbows about Australia’s economy. There are “downside risks”: the outlook for the global economy is uncertain; while low income growth and falling property-prices continue to weigh on domestic consumption.
Where to from here for the RBA? The overall takeaway from the meeting: “the Board will continue to monitor developments in the labour market closely and adjust monetary policy if needed”. For financial markets, this is quite an open-ended statement. As-a-result, somewhat unlike the last 4 or 5 months where cuts were considered imminent, and very much a foregone conclusion, circumstances are a lot more data-dependent now. Market pricing suggests the RBA will stay on hold here, before eventually cutting again around December. It makes growth, labour market, and inflation data more impactful now, as traders judge whether expectations are accurate, or whether the next cut ought to be brought-forward, or deferred.
RBA-Chat and Building Approvals: The day ahead for Australian traders and econo-watchers will be highlighted by the release of this month’s trade balance figures, and local Building Approvals data. The latter ought to show a slight improvement in construction activity last month within the Australian economy, though the annualized figure will show a less flattering year-on-year contraction of -21.5 per cent. Barring an extraordinary miss, the data won’t shift the narrative too much, either way. But after yesterday’s interest rate decision, it may bring-about a marginal re-pricing of when the next rate cut ought to occur from here.
Oil prices to become about demand: Oil prices tumbled nearly 5 per cent in overnight trade, after the end of what was a highly anticipated OPEC(+Russia) meeting ended yesterday. Announced at the meeting was an extension to production cuts for another nine-months, to stabilize the price of oil in the face of a slowing global economy. Undoubtedly, the sell-off in oil last night was due to the fact that production cuts were more less agreed to by the Saudi’s and Russians at the weekend’s G20 Summit, taking the bite-out of the formal announcement. Nevertheless, the price response indicates that right now, the announced cuts won’t be enough to offset the global growth slowdown.
A new chapter for Bitcoin (and other cryptos)?: Bitcoin prices plunged yesterday, to trade back below the $US10,000-mark, briefly. Though a small-blow to the Bit-Bugs, the move could (arguably) signify an interesting development in the crypto-currency’s lifecycle. Seemingly, Bitcoin has behaved as the anti-fiat-currency, anti-geopolitical-risk, store of value it was, in principle, designed to be. That is: it rallied last month on the increased likelihood of global rate cuts, and potential trade sanctions and trade barriers; and sold-off when those risks diminished. Conclusions ought not to be leapt to, of course: but perhaps markets are beginning to take to Bitcoin as a legitimate form of anti-risk investment.
Written by Kyle Rodda-IG Australia