Scoreboard: Global sell-off

The emerging market crisis continued to dominate the market on Friday night and global equities sold off as a result. Bonds rallied. A very modest decline in the Chinese PMI over the weekend isn’t going to help sentiment this week. The index fell to 50.5 from 51, although this index is still above 50, which indicates ongoing expansion.

Global stocks sold off on both sides of the Atlantic with the S&P500 off 0.7 per cent (1782), the Dow off 149pts (15698) and the Nasdaq down 0.5 per cent (4103). In Europe we saw similar losses with the Dax down 0.7 per cent, the CaC fell 0.3 per cent and the FTSE100 as 0.4 per cent lower.

Rates rallied despite the Fed’s tapering as safe haven flows increased. The yield on the US 10-year note is at 2.649 per cent from 2.7 per cent Friday morning.  The 5-year note is at 1.49 per cent and the 2-year is at 0.34 per cent. Aussie debt futures were little moved from Friday afternoon, with 3s at 97.13 and 10s at 96.065.

Commodities were all weaker, crude in particular, with Brent off 1.2 per cent ($106.4) and WTI down 0.8 per cent to $97.5. In the metals space, gold was off smalls ($1240), as was silver, while copper fell 0.9 per cent.

Forex moves weren’t notable. The Australian dollar is little changed at 0.8772. The euro was down about 40 pips to 1.3484, the British pound fell in tandem (about 50 pips) to 1.6429. The Japanese yen is at 101.97 from 102.4.

Elsewhere we saw the European unemployment rate steady at 12 per cent in December, while European inflation fell to 0.7 per cent year-on-year from 0.8 per cent year-on-year. In the US, personal income was flat in December, while spending rose 0.4 per cent. The personal consumption deflator, the Fed’s favoured measure of inflation rose to 1.1 per cent year-on-year from 0.9 per cent.. There were some minor Fed activity indices as well such as the Chicago purchasing managers index, which fell to 59.6 in Janaury from 60.8. Lastly, the final January estimate of consumer confidence from Michigan Uni was at 81.2 from 80.4.

In markets this week, the SPI suggests our market will fall 0.4 per cent today and there are forces that will continue to weigh on the market for the rest of the week.

There is a decent run of data for the domestic market. It starts today with RP Data-Rismark’s house price series (0930 AEDT), TD’s inflation gauge (1030 AEDT) and the monthly building approvals (1130 AEDT). 

On Tuesday we get the Reserve Bank’s decision at 1430 AEDT and the unanimous expectation is that the Bank will hold rates steady. Recent partial indictors show the Australian economy is improving. We know inflation has spiked higher and now sits at the top of the RBA’s band (underlying measures).  

The danger for our market is that the RBA continues to try and jawbone the Australian dollar. In a recent interview, Heather Ridout completely ignored the sharp upturn in many Aussie data releases, the spike in inflation and the property rebound to focus solely on the Australian dollar, arguing it should be much weaker. In doing so, the board has had to talk down the entire Australian economy, which obviously risks harming the fragile confidence that has built up here and could encourage international investors to give Australian equities a wide berth. Outside of that, we see Aussie trade and retail sales data on Thursday, while on Friday we get the RBA’s statement on monetary policy. On a reasonable assessment, the bank would have to revise both inflation and growth forecast higher. They may be reluctant to do this or only pay lip service to it, given the exchange rate target.