With US markets up moderately on better than expected factory orders, and European markets up sharply in a catch up rally, stock market momentum appears positive heading into today’s Asia Pacific trading.
The main focus of the day today is likely to be on the RBA’s latest interest rate decision and statement. The street is widely expecting a 0.25% interest rate cut, but I’m not totally convinced for a number of reasons:
1) Australia economic data has not really been bad enough to force a cut. Employment growth came in well above expectations at 35K last month, inflation is running above 2% the target for many central banks and manufacturing PMI while admittedly still under 50 did show an improvement this month.
2) AUD is still a lot closer to its 52-week low near $0.7500 than its 52-week high near $0.9500 so there is still a lot of currency based stimulus in the system as well.
3) AUD had been climbing until the middle of last week and RBA rate cut speculation only really picked up in earnest after the RBNZ threatened to cut interest rates at its own meeting last week. The difference is that he RBNZ raised interest rates 4 times last year, so they have more scope to come back down.
There have been rumblings that China’s economy continues to weaken but it would seem to me that if the RBA did cut rates it would be as a pre-emptive strike to soften the blow of lower commodity prices
Interestingly, one of the reasons I think the RBNZ took a more dovish stance was because NZD was approaching parity against AUD and they probably wanted to knock the Kiwi dollar back down. An RBA cut today, however, could be a spark for another drive toward par for AUDNZD.
With AUD still above Governor Stevens $0.7500 comfort level, I suspect the central bank may try to talk the dollar down again and could indicate openness to cut rates in future but I think they may pull the trigger on an actual cut.
In recent months, Australian stocks and AUD have been trending sideways in a $0.7550 to $0.8000 channel for AUDUSD
and a 5,750 to 6,000 channel for the S&P/ASX. With both markets trading near the middle of their ranges it would appear that prospects for a cut have gone from near zero to about 50-50 over the last few days. On that basis, if the RBA was to deliver a cut, it could drive stocks to the top and AUD to the bottom of their current ranges, but if the hold off, stocks could fall back to the bottom while AUD could snap back up toward the top of their current channels.
Ahead of the meeting, Australian trade, Service PMI and housing data could add to the interest rate speculation and keep AUD active through the day.
China sensitive markets also could be active today with chatter and speculation picking up lately on whether the PBOC could stage another round of interest rate and reserve requirement cuts to boost its flagging economy.
Europe is pretty quiet for news Tuesday but UK markets could be active with the FTSE
getting its first chance to celebrate the birth of Princess Charlotte over the holiday weekend. Speculation over the potential result of Thursday’s UK election may also influence trading in UK stocks and GBP. In North America, trade and US nonmanufacturing PMI are due but the main focus may remain on payroll figures due later in the week.
There have been no major corporate announcements after the US close today.
Significant announcements released overnight include:
US factory orders 2.1% vs street 2.0%
Germany 52.1 vs street 51.9
France 48.0 vs street 48.4
Spain 54.2 vs street 54.7
Italy 53.8 vs street 53.5
Norway 50.5 vs previous 48.6
Sweden 55.7 vs street 54.0
Eurozone 52.0 vs street 51.9
Upcoming significant announcements include:
9:30 am AEST Australia service PMI previous 50.22
11:00 am AEST Australia new home sales previous 1.1%
11:30 am AEST Australia trade balance street (1.0B)
2:30 pm AEST Australia RBA interest rate 0.25% cut to 2.00% widely expected
10:00 am BST Eurozone producer prices street (2.3%)
8:30 am EDT Canada trade balance street ($0.8B)
8:30 am EDT US trade balance street ($40.3B)
10:00 am EDT US ISM nonmanufacturing PMI street 56.5