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The Law of Diminishing Returns

Markets around the globe are delivering a lesson to Asia Pacific policy makers on the law of diminishing returns. Yesterday’s rate cut in Australia saw shares fall and the AUD rise, in defiance of basic economic expectations. Similarly, the unveiling of further fiscal stimulus in Japan very much in line with packages delivered over the last 20 years saw shares fall and the Yen rise.

Pessimism is now stalking investors, particularly in light of recent gains and market indices at annual or all-time highs. European shares were trounced overnight, and negativity overshadowed US trading. Oil markets dipped further, below key support levels. Questions around the efficacy of further stimulus could see local participants slam the share market.

This market squall comes as Australian company reporting season kicks off. Rio and Genworth Mortgage report today, although the season doesn’t get into full swing until next week. Commodity prices are sending mixed signals, with stronger gold and iron ore prices offset by falls in oil. 

Adding to the uncertainty are China services PMIs today, Australian retail sales tomorrow, a rate decision from the Bank of England tomorrow night and US non-farm payrolls on Friday night. Negative leads and uncertainty around potentially market moving events may see the local index fall further than the 35 point indication from overnight trading in futures markets.

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