Market reaction to APRA’s announcement on capital requirements for Australian banks and BHP’s production report have set the tone for the ASX 200 this morning.

The fact that the deadline for implementation for increasing bank equity capital is not until January 2020 may give banks options in terms of raising the capital organically and is likely to be greeted positively by the market.

This morning’s announcement of a 10.5% Tier 1 capital requirement for the major banks may be higher than some of the most optimistic investors had been hoping for. While markets were uncertain about what APRA would ultimately require, some saw 10% as a possibility. However, the timetable for implementation and the announcement itself now remove one source of uncertainty for bank investors.

The ultimate cost of the new capital requirements will not be known until APRA finalises its position on the risk weightings required for mortgages. This could have a substantial impact on the amount of equity capital banks are required to hold. APRA will release a paper on this later this year and this looms as a key event for bank investors.

To the extent that the cost of higher bank capital requirements are ultimately born by property investors and tenants, these moves are also likely to be another dampening influence on the Australian property market.

BHP shareholders are getting significant benefit from recent price improvements and cost control. However, its production report, while solid did not contain a lot to excite the market. Although iron ore and petroleum guidance was achieved, production was at the lower end of guidance ranges.

The firm lead from US markets last night was mainly about individual stock results and will probably not figure much in local investor thinking this morning. However, the lack of stock market reaction to the Trump Administrations’ failure on healthcare reform suggest equity market valuations are no longer dependant the prospect of US economic reform.  

The big rally in the Aussie Dollar was associated with a clear break above resistance and capitulation by short holders.  This raises the stakes further for potential volatility associated with tomorrow’s employment data.