Looks like the Aussie market’s going to have a bit of catching up to do today, and in fact the SPI is up 0.7 per cent as I write. You see, after the carnage we saw on the floor yesterday, markets in the US and Europe seem to be wondering what all the fuss is about.
Well, okay, not quite. Mostly stocks were off a per cent or so at the open, but they recovered quickly, and sufficiently so that European stocks were ‘only’ (compared to our market) off 0.4-0.5 per cent at the close (0.9 per cent and 1.3 per cent for Italy and Spain).
Over on Wall Street, all that the sharp drop at the opening managed to achieve was to bring in the bid, and all those early losses were reversed. Well, most of them.
As I write, the offer is back on, and having spent much time bouncing around zero the Dow is currently off 0.4 per cent (14,452), as is the Nasdaq (3235). The S&P500 never really embraced the zero bound and is underperforming – off 0.6 per cent (1552). Still not a patch on what happened in Asia yesterday.
So what gives? Well the fact is, buying the dips has brought bucks to the brave these last few years, and that is providing a measure of support. It’s not sufficient to bring stocks back into the black – but please, be reasonable, there is a crisis on and the Financial Times is doing everything it can to start a bank run. Generally though, you buy into panic – that’s the motto at the mo’, which I’ve got tattooed on my face… in Latin – and it’s catching on. Can’t say I’m entirely happy about it though, as it was easy trading – but there you go.
The latest is that the Cypriot government still hasn’t approved the deposit tax – banks will remain closed till Thursday. So in order to make it a little more palatable, the proposal is that deposits of under $100,000 will be taxed at 3 per cent; those from $100,000 to $500,000 at 10 per cent; and 15 per cent for those above $500,000. The EU doesn’t seem fussed – only that the money is raised is important. Someone who is fussed is Russian President Vladimir Putin – a lot of his mates have money in Cyprus, as does he probably.
Moving on, it turns out that bond markets don’t seem too fussed by all the Cyprus action either. Bonds in Spain and Italy haven’t moved much in response to all of this and compared to Friday the Italian 10-year is about 3 bps (or 4.57 per cent) higher, while the Spanish equivalent is 6 bps, or 4.96 per cent. They are elevated for other reasons, but this latest bout hasn’t done much so far.
Otherwise for the price action we’re talking crude up 0.23 per cent to $93.71, gold $11 higher to $1603, while copper is off 3 per cent. The Australian dollar is about 40 pips higher at 1.040, the euro is 8 bps higher at 1.2960 and the yen is at 95.35.
Not much else to day for the session really. There wasn’t a lot of data. In the US the NAHB housing index was it – and it fell 2 whole points to 44.
So looking at the day ahead, the main Aussie economic news comes from the Reserve Bank's minutes. Now, the Reserve Bank board has misread the economy, it’s as simple as that. I know there are a bunch of guffawing apologists for the board (from the 'they can do no wrong' school) who will deny it, but you can’t deny fact. They screwed up in 2008 and 2009 as well, yet were loudly cheered all the way by the same apologists: ‘hurrah’, ‘well done’ they said, as mortgage rates approached 10 per cent. Me? I cried when my mortgage rate was up there. Every. Single. Day.
Don’t forget though that most of these people rely on the Reserve Bank's grace for something – leaks or interviews or client meetings. All it does is encourage bad policy as it supresses critical thought. People dare not criticise, which is why you get so much group think and why the consensus is always invariably wrong – but there you go. Don’t listen to what they say though.
Anyway, with that in mind, the minutes will be dovish and I don’t think the board will change that view lightly. Best bet is they will still cut on a whim and ignore all the recent positive developments and dataflow: Cyprus could be it – or maybe sink holes in Florida...
Outside of that, there’s not much. Tonight we see UK inflation, but that is no longer a policy target. Of more importance will be the German ZEW survey and US housing starts.
Have a great day…
Adam Carr is a leading market economist.