Scoreboard: Bundesbounce

Very little data out of the US or Europe last night, in fact none to mention, but stocks on both sides of the pond ended weaker. In Europe, the major indices were between 0.5 - 0.97 per cent, while the S&P500 closed 0.6 per cent weaker (1646), the Dow lost 71 points (15,010) and the Nasdaq was down 0.4 per cent (3589). Moves once again were modest, and of course volumes were light due to the summer holidays.

So can we read too much into the night’s moves? Not really. The taper is in the background, sure, and one thing to note is that bond yields are still rising. Last night the US 10 year rose to 2.88 per cent or 3 bps from yesterday afternoon. Ironically the higher bond yields go, the less likely the taper is – or so Bernanke suggested. But then again he suggests a lot of things. Don’t forget Bernanke already thought the spike in bond yields was overdone a month or so ago, and we’ve added on another 30 bps since then. So what’s a poor central banker to do? Financial conditions are ‘tightening’ – Keep printin’ that’s what.

In forex markets, there were a few interesting things going on. The Euro shot about 50 pips higher and hit a high of 1.3370 after the Bundesbank suggested that the ECB’s promise to keep rates low for a while didn’t mean that rates wouldn’t go higher. Hey, they aren’t far from zero people so you can see the logic there – rates could actually rise quite a lot and policy would still be extremely stimulatory – only a fool would suggest otherwise, and plenty do. Anyway, the Bundesbank is concerned about inflation, rightly, and will be pushing for rates to go higher if inflation, already at the top of the target, gets any higher. Euro gave back those gains though, probably because the Bundesbank isn’t pushing for higher rates currently and the offer soon came on from the peak.

As I write, the unit is at 1.3339 or 18 pips higher. Not much that was too exciting for the majors otherwise – sterling was up 25 bps to 1.5625 and yen is at 97.62 – little changed. Most of the action is happening in the emerging market space – India’s Rupee is at an all-time low – and Indonesia’s Rupiah was hit hard yesterday as well – as was its equity market. There’s a lot going on here, concerns about the global impacts of a Federal Reserve tapering (no doubt to be discussed at this weekend’s Jackson Hole Conference) and perhaps renewed fear of current account deficits. Whatever the case, moves were big and even the Australian dollar dropped almost a big figure, as caught up as we are in the emerging world, to 0.9115. Commodities were otherwise all off smalls – crude down 0.3 per cent ($107.2), gold down $5 ($1366), while copper was off a larger 0.8 per cent.

For our market today, the SPI suggests Aussie stocks will be about 0.4 per cent lower, and it should be a quiet day in regards to news and data. That is outside of those companies that report today, like NAB and BHP – but macro-wise it’s light. We get the Reserve Bank’s minutes today and as I’ve said before, while the Bank has the Australian dollar as its target, these sorts of documents are of limited use. The way I see things at the moment, and their behaviour shows this, their macro view doesn’t really matter as they shape it to fit the exchange target they’ve got. The RBA board have done a terrible job in my view, not only in terms of policy but in demonstrating that they even understand the basic macro backdrop.

The fact is the board hasn’t called the economy (global or domestic) too well over the years, focussing far too much on the latest hysteria of the day – whether that be Europe’s troubles, a US double dip, a hard landing in China or the end of the mining boom. Pick-one, they got it consistently wrong, yet still cut rates – and helped to erode confidence (where we need it most) in the process. Houses prices look set to surge again – that’s about the key impact to date and not what the country really needs. So for me, the minutes aren’t that valuable. The signal at the moment is that rates could be on hold, but they’ve done this before only to cut again. It will depend on what the Australian dollar does and that of course will largely be determined by what the Fed does and what happens in China.

Other than that there isn’t much – European construction output and the Chicago Fed national Activity index.

Have a great day…

Adam Carr is a leading market economist.

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