Overnight: Of Stimulus And Trade

By Greg Peel

In the Bag

“Given the amount of spare capacity in the labour market and the economy more broadly, members agreed that it was more likely than not that a further easing in monetary policy would be appropriate in the period ahead.”

And with that, the ASX200 rallied 39 points and every sector closed in the green.

What’s surprising about this extract from the minutes of the June RBA meeting, released yesterday, is not that the board is expecting further easing – economists are queued up with forecasts of up to three more cuts in the next 12 months – but that it is unusually candid. Central bank-speak is typically a lot more nuanced.

We recall, nonetheless, that Philip Lowe spent the bulk of 2018 suggesting the next move in rates would more likely be up than down, but “more likely than not” is an emphatic rate cut signal. It will all come down to jobs, as is referenced by the “amount of spare capacity in the labour market”.

The RBA wants to see the unemployment rate down to 4.5%, which economists generally consider a big ask. Last month’s jobs data showed the unemployment rate steady at 5.1% but almost all jobs added in the month were part-time, suggesting no relief on “underemployment”, which implies no relief from weak wage growth. This will be the critical factor.

In the meantime, yesterday’s rally was led by healthcare (+1.3%), consumer discretionary (+1.1%) and staples (+0.8%), which benefit from lower rates. For the banks (+0.5%) it’s a two-edged sword – lower rates relieve mortgage stress in a slowing economy but also reduce bank margins.

Yet lower rates do make bank yields more attractive, which is why telcos, utilities and REITs also saw buying. The resources sectors largely sat it out, having already outperformed of late.

Also failing to participate were Speedcast International ((SDA)), which fell -8.4% for reasons unknown, Pilbara Minerals ((PLS)), which fell another -6.3% in the wake of Monday’s production guidance downgrade, and McMillan Shakespeare ((MMS)), which had provided a weak trading update (-6.1%).

On the flipside, Nearmap ((NEA)) jumped 9.5% after Macquarie initiated coverage with an Outperform rating, Emeco Holdings ((EHL)), continued to rise (+8.8%) on corporate action speculation, and Afterpay Touch ((APT)), found some bargain hunters (+4.9%) after a steep fall.

The economy is slowing – hooray! And don’t think Australia’s alone. Last night the ECB president lit a fire under European markets by suggesting more stimulus may be ahead, and Wall Street is looking forward to at least a rate cut hint, if not an actual cut, from Fed tonight.

Triple Play

Wall Street hadn’t yet opened when Mario Draghi, speaking at an ECB forum, said that if the European economic situation deteriorates in coming months, the central bank will announce further stimulus measures. Given the ECB cash rate is already negative (and the German ten-year yield is at a record low -0.3%), a return to QE would presumably be the preferred option.

The German stock market jumped 2% on the comments. The US ten-year yield fell -6 basis points to 2.03%. A 2% rate looks a lot more attractive than what’s on offer in Europe.

And in response, Donald Trump tweeted that Draghi’s comments “immediately dropped the Euro against the Dollar, making it easier for them to compete against the USA. They have been getting away with this for years, along with China and others,” and calling EU stimulus “unfair” to the US.

This is the man that not so long ago implored the Fed to cut its rate by 50 basis points and reintroduce QE. Seems “fairness” only works in one direction.

Draghi’s comments also fuelled further Wall Street excitement of a similar tone emanating from the Fed statement due tonight, if not an actual cut. But if that wasn’t enough to send US stock markets higher, Trump’s next tweet set the world on fire.

The President said he’d had a “very good telephone conversation” with President Xi, and that they would have “an extended meeting” during the G20 meeting in Osaka.

As late as Monday night, the US Commerce Secretary had been downplaying any notion of deal being done at the G20, and indeed even a meeting being held between Trump and Xi. And for some time, the Chinese have been suggesting no meeting was being planned. The two trade delegations will now start work on what exactly the presidents might talk about.

Cleary this is positive news on the trade front, although hardly definitive. Wall Street has stoically maintained its confidence in a deal being finally achieved, and with last night’s rally the S&P500 is back to within 1% of its all-time high. That high was posted earlier in the year when it was assumed a deal was about to be signed.

So what’s the upside from here? Clearly the downside is a yawning gap, if the G20 does not go well. Meanwhile, Trump still has the EU on hold while he tries to sort out China, with tariffs pending. Mario Draghi didn’t really help matters last night.

But it’s all a bit chicken and egg, given Draghi alluded to the trade war being a likely trigger for further stimulus. Meanwhile, the Fed has admitted that monetary policy is difficult to set when trade remains an unknown.

So while Wall Street added up all three “positives” last night – ECB, Fed and G20 — it seemed not to occur that any progress on trade would at least force the Fed to hold off on any rate cut decision, or even scrap such a notion.

Computers don’t tend to think too hard.

Commodities

Finally, LME base metal traders had something to cheer about.

There’s no stopping iron ore.

The US dollar index is up on the euro’s fall, but gold has popped again on the prospect of worldwide central bank stimulus.

The oils joined the euphoria.

As did the Aussie, which dropped to a low of US68.3 cents on the RBA minutes before bouncing back to US$0.6874 overnight, up 0.3% over 24 hours.

Today

The SPI Overnight closed up 39 points or 0.6%. I doubt the resource sectors will sit this one out.

The Fed statement will be out early tomorrow morning our time.

The Australian share market over the past thirty days…