MARKETS SPECTATOR: Wish upon a rate cut

Amid a slew of poor economic data, another unexpected rate cut would give the markets a much needed jolt.

Last month the Reserve Bank of Australia seemingly breathed new life into local stocks when it cut its benchmark cash rate to 2.75 per cent, the lowest since the Reserve Bank began publishing such a rate in January 1990.

But it has hardly helped shares. The S&P/ASX200 Index has dropped 5.8 per cent since May 1, according to Bloomberg data. Interestingly the Australian dollar has fallen by the same amount against the US currency during the same period, according to Bloomberg.

The drop in the local currency is probably preventing the Reserve Bank cutting again. Few see signs of any pick-up in Australian economic activity. In fact the news onshore and off is gloomy. Australia’s April retail sales came in below estimates yesterday, plus 0.2 per cent versus an estimate of 0.3 per cent, reinforcing the opinion of many that the consumer is not confident in their prospects. Job advertisements fell 2.4 per cent in May, 18.5 per cent year on year, hardly an optimistic read out for the local economy.

“The economy certainly needs a rate cut but the Fed’s tapering of QE has prompted a slide in the Australian dollar and probably prompted the Reserve Bank to hold off this month,” says Matt Sherwood, strategist at fund manager Perpetual.

Of the 26 economists surveyed by Bloomberg News just two forecast a rate cut by the central bank today. One of them is Shane Oliver, the head of investment strategy at AMP Capital Investors.

The economic read out from China is weak. The May HSBC China PMI showed the manufacturing sector below the key 50 level, which is the cut off between expansion and contraction, at 49.2. This is lowest since September 2012 and well down from 50.4 in April.

The average price of China domestic hot rolled steel sheet was 3,444 renminbi yesterday, down 73 per cent since May 1 and 13 per cent since the beginning of the year. Analysts believe steel products are being dumped into the Chinese market by local steelmakers whose operations and workforces the Chinese government is keen to support, in order to prevent social unrest.

This is of course not a good sign for mining shares. Damien Boey, Credit Suisse’s Australian strategist, says there is evidence that investors are rotating back into banks and out of mining stocks when the reverse had been happening since March.

“Schizophrenic,” is the word Boey uses to describe the nature of investor money flow.

Investors may buy ANZ Bank, Commonwealth Bank, National Australia Bank and Westpac stock secure in the knowledge that their fundamental business is solid and their payout ratios as it relates to their dividends are secure.

The four biggest bank stocks have all fallen since May 1. This may further prompt investors to buy them.

ANZ shares are down 13 per cent since the beginning of May, while Commonwealth Bank has slid 8.9 per cent, and NAB and Westpac have both fallen 14 per cent during the same period.

In contrast, BHP Billiton shares are up 4.3 per cent since May 1 as some investment banks, notably Goldman Sachs, have recommended investors buy resource stocks such as the world’s biggest mining company and sell bank stocks such as Westpac. 

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