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Stocks recover losses on rate-cut hopes: APAC brief - 8 Aug

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KirbyIG

Stocks recover losses on rate-cut hopes: Wall Street equities climbed into the close, after an ugly open for the US market overnight, while global bond yields continued to fall, on increased bets of interest rate cuts from the world’s largest central banks. When market action is still foggy, it can be hard to draw firm conclusions about cause-and-effect in price action. But it would strongly seem that the latter was responsible for the former during last night’s trade. Hence, US stocks were up on the basis that traders are pricing in a remarkably high chance that the Fed will be cutting interest rates by 50-basis-points at their next meeting, and that the ECB will be cutting rates next month, too.

 

Cheap money versus cold, hard fundamentals: The impact to valuations of expected interest rate cuts has prettied-up an otherwise bearish market right now. It’s the short-term paradox that confounds people, sometimes: the economic outlook turns bad, so markets price-in lower rates, which drives money into the stock market, as investors chase yield. It’s an almost mechanical process that market prices blithely follow. And frankly, global equities have been juiced for months – to all-time highs, in some markets – as that dynamic plays-out. However, the underlying factors driving that trend are unstable, and reality can only be avoided for so long. Eventually, if the trend doesn’t turnaround, then the fundamentals will win out.

 

Fundamental outlook still murky: And the fundamental outlook right at this moment isn’t looking positive. The global economy is probably closer to the end of the business cycle than it is the middle-or-beginning. And now a no-holds-barred US-China trade war threatens to accelerate that process. Commodity markets are still betraying best that sense of foreboding regarding the economic outlook. Oil plunged again overnight, as demand-side concerns ratcheted up once more after a bigger than expected build in US crude inventories last week. While gold prices have spiked, to trade as high as $US1510, as markets seek to hedge against lower global interest rates.

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RBNZ shocks econo-watchers: The Reserve Bank of New Zealand shocked financial markets yesterday, cutting interest rates at its meeting by 50-basis-points. A 25 basis-point cut was expected by the market leading into the meeting, but few in the market expected the RBNZ to pull out a rare “double-cut”. Such actions from a central bank more-often-than-not come in times of relatively severe financial or economic stress. The decision, therefore, rattled trader’s nerves somewhat. The New Zealand Dollar plunged nearly 2 per cent in the Asian session along, dragging the Australian Dollar down with it. The move from the RBNZ isn’t expected to be a “one-and-done” effort either: another cut is expected by year-end.

 

A new era of central banking? The RBNZ’s decision to so aggressively cut interest rates speaks less of the current fundamentals in the New Zealand economy, but more the changing face of central bank policymaking across the globe. Afterall, the data coming out of New Zealand right now isn’t that bad, with growth around the long-term average, the labour market at notionally full-capacity, and inflation is only slightly below target. The move by the RBNZ is tantamount to a pre-emptive strike on a forecast slowdown in the global, and by extension, New Zealand economy. It marks another small milestone for economic policymaking: central banks are extending their mandates to managing the total fortunes of their respective economies.

 

Bets of RBA cuts increased: In response to the RBNZ’s policy move, market participants have increased their bets that the RBA may prove, in time, to be a little more dovish than expected, too. The odds of future rate cuts were increased and brought forward by interest rate traders yesterday. The interest rate futures curve is suggesting that a rate cut in September is a sixty-forty proposition, a full-cut is baked in for October (once again), and another cut after that, before year-end, is roughly considered a 75 per cent chance. If such an outcome materializes, it would take the RBA’s overnight cash rate to a new low of 0.50 per cent.

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Lower rates and currency supports ASX: That dynamic smashed the Australian Dollar yesterday, with the local unit touching decade-long lows at the 66-cent level. Australian Government Bond Yields also notched-up a few (perhaps unwanted) records, too: the 3 Year Government Bond yield fell to a new record low of 0.64 per cent, while the 10 Year Government Bond yield fell to 0.95 per cent. Though clearly a sign of the prevailing concern the market possesses for the Australian Growth outlook, the tumble in the currency and risk-free rates juices the ASX200 yesterday. The benchmark index waivered alongside its regional counterparts in the early stages yesterday, only to consolidate its gains as the AUD and yields dropped.

 

Written by Kyle Rodda-IG Australia

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