Markets: Stevens' tough ASX audience

Monetary stimulus may be bearing fruit in the US and Japan, but the local market barely blinked an eye the Reserve Bank's latest rate cut.

The yawn that greeted the Reserve Bank of Australia’s interest rate cut yesterday is perhaps an indication that in the near term at least, the stock market is not going to jump for joy whenever the cash rate is cut. Yesterday the S&P/ASX 200 Index fell 0.1 per cent to 5105.629 amid predictions the central bank would cut the cash rate further still later this year. Governor Glenn Stevens said in his statement that the bank’s board "will continue to assess the outlook and adjust policy as needed to foster sustainable growth in demand and inflation outcomes consistent with the inflation target over time".

Stock markets are bloated with easy money, and Stevens noted that,“globally, financial conditions remain very accommodative". The US Federal Reserve is buying $US80 billion ($89.886 billion) worth of bonds a month, and the Bank of Japan is engaged in a similar program with a pledge to increase its monetary base by $US704 billion a year. Still, investor confidence remains fragile locally. “Volatility in financial markets has increased,” says Stevens.

It remains an irony that the easy credit policies of the last decade, blamed for the creation of investment products that brought the global economy to its knees, are being repeated in an effort to create conditions that ensure a recovery. Such policies may be bearing fruit in the US and Japan, but eight cuts in Australia's cash rate over the last 18 months have yet to boost our economy.

“The economy has been growing a bit below trend over the past year,” says Stevens. “This is expected to continue in the near term as the economy adjusts to lower levels of mining investment.”

This adjustment is being played out amid impatience from investors who want evidence that company earnings will rise in 2014. They may be in for some disappointment, however – this reporting season chief executives are more likely to announce they're cutting expenses and spending than to forecast improving revenues and profits. That’s not a bullish message for investors.

But until there's evidence that rate cuts and the weakening dollar are having an impact on bottom lines, investors will remain sceptical of further stock market gains. Perpetual’s Matt Sherwood says they may well go back to stocks that offer yield – but even the stock prices of the big four banks and Telstra are perceived to be trading at very high valuations.

InvestSMART FORUM: Come and meet the team

We're loading up the van and going on tour from April to June, with events on the NSW central & north coast, the QLD mid-north coast and in Perth, Adelaide, Melbourne, Sydney and Canberra. Come and meet the team and take home simple strategies that you can use to build an investment portfolio to weather any storm. Book your spot here.

Want access to our latest research and new buy ideas?

Start a free 15 day trial and gain access to our research, recommendations and market-beating model portfolios.

Sign up for free

Related Articles