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Stocks higher, yields lower, growth concerns persist: APAC brief - 25 Jul

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KirbyIG

The S&P500 rallied to another record high, as Wall Street shrugged off poor earnings from industrial mega-companies Boeing and Caterpillar, and instead focused on solid-enough results from US-tech giants. The rally was supported by a new-leg lower in global bond yields, after European manufacturing PMI data greatly disappointed expectations, and reaffirmed the continued slowdown in the Eurozone economy. That gave the DAX a lift. The Euro slipped, the Dollar edged higher, and gold climbed by half-a-per-cent, too. Oil prices dropped, even in light of a larger than expected drawdown in US crude oil inventories, as commodity markets remain fixed on concerns regarding the global economic outlook.

ASX breaks to fresh decade-long highs: The ASX200 received a double-dose of sentiment-boosting news yesterday. The first pertained to reports that the US would be sending top-diplomats to China to restart trade negotiations next week. The second related to Westpac’s economics team’s (lead by interest-rate-Oracle, Bill Evans) pronouncement that it now expects the RBA to cut rates to 0.50 per cent by February. The stories generated the bullish-one-two combo that stock-markets always hunger-for: an ostensibly rosier growth outlook; and the prospect of easier monetary policy. The ultimate result was an ASX that touched fresh 11-year highs during intraday – even despite a sell-off in the large-cap mining stocks, following a tumble in iron ore prices.

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Governor Lowe Speech to headline local calendar: The economic calendar has been especially light in Australia this week. Not that any new information would likely change current fundamentals. Growth is weak, the labour market slack, and inflation subdued. The RBA ought to cut interest rates again, eventually, to combat this dynamic. The highlight of the week from Australian econo-watchers comes today, and should be of intellectual-interest given yesterday’s Westpac interest-rate call. RBA Governor Philip Lowe is scheduled to talk on the subject of “Inflation Targeting and Economic Welfare”. What’s revealed by the Governor is unlikely to move markets too much; however, it will provide some clarity on the RBA’s mentality right now.

The (dis)inflation question: Really, Governor Lowe’s speech might well be viewed as a testimony on the RBA’s recent policy shifts. A contentious subject in the world of macroeconomics and policymaking is what to do about (dis)inflation. In particular: what causes it, why it’s a become a problem now, how to address it, and whether current policy settings are making it better – or even worse. Governor Lowe’s words today, to borrow a phrase from the New York Fed, should be considered an “academic exercise”. Nevertheless, for those with an interest in the long-term fortunes of the Australian and global economy, today’s speech may provide insight into the investment landscape of the not-too-distant future.

Markets see inflation lower-for-longer: In the short-term, and regarding real-world phenomena: markets are demonstrating little faith inflation will return to target anytime soon. It’s an issue that applies equally to Australia, as it does to other developed economies across the globe. Here in Australia, market measures of future inflation imply that CPI ought to remain well below the RBA’s 2-3 per cent target-band. That’s contributed to the market pricing in a rate by November. If the status quo doesn’t change, and assuming those indicators are accurate, that means an environment where rates are lower-for-longer. That spells ill for the Australian Dollar, and probably keeps liquidity flowing into stocks, so long as earnings growth remains.

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ECB meets tonight: Monetary policy takes on real-world significance in Europe, as the European Central Bank meets tonight. It’s become clearer recently that, in line with central banks across the world, the ECB will need to boost monetary stimulus in the Eurozone, to combat a looming economic slowdown. Not only that, but in the brutal, beggar-thy-neighbour world of global monetary policy, not making such a shift would put Europe at the back of the pack in the global race-to-the-bottom to cut interest rates. As it stands, markets are betting that the ECB will implement two 10-point rate cuts before the end of the year, and probably announce a fresh round of quantitative easing, in time.

ECB likely to inspire market movement: As far as this meeting goes, the outlook is a little more split. The balance of opinion points to a hold decision from the ECB. Interest rate futures suggests a 60% chance of that outcome; versus, naturally, a 40% chance of a cut. It opens up plenty of room for heightened volatility in financial markets around this event – especially in the Euro. The shared currency has been range-trading for a matter of weeks, on remarkably low volatility in global foreign exchange markets. A rate cut would send the Euro plunging into the 1.11 handle – and perhaps further. While some sort of hawkish-hold decision could see the currency make another foray above 1.13.

 

Written by Kyle Rodda-IG Australia

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