MARKETS SPECTATOR: Rates fence

The market is pricing in another 58 basis points worth of rate cuts this year and while no one's certain when they'll happen, most traders expect strong support for stocks to continue.

Don’t be surprised if the Reserve Bank cuts rates today, many traders and analysts say.

The market is pricing in 58 basis points of cuts this year, according to UBS. Its view is that the Reserve Bank will not cut the benchmark cash rate today.

Others say there is a good chance.

“It’s 50/50 as to whether they go this month or next,” says BT Financial Group chief economist Chris Caton. “It would be no surprise to me if they cut today.”

One trader believes the Reserve Bank will cut the cash rate, currently 3 per cent, three times this year as consumer confidence, the housing market, the Chinese economy and investment in the non-mining sector of the economy all show no signs of a rebound. The trader believes that as much as 75 basis points of cuts are in store.

Rate cuts help underpin stock markets as investors seek higher yields while company earnings may be helped by lower capital costs and increased consumer activity.

Still, traders and analysts see the market as ‘toppy’. UBS strategist David Cassidy has a year-end target of the S&P/ASX 200 Index. He says the market is “not outrageously expensive” yet it is “fully valued” at current levels. The S&P/ASX 200 Index is trading at 14.5 times 2013 forecast earnings. That’s a touch above its 20-year average, says Cassidy.

At 1109 AEST the S&P/ASX 200 Index was down 6 points, or 0.1 per cent, to 5150.2.

“We’re in unchartered territory,” says Cassidy. He reckons investors may continue to be attracted to stocks because Australian government bond yields, at about 3 per cent, are so low. “It’s unprecedented that long bond and cash rates are at 3 per cent.”

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