Scoreboard: Market jitter bug

European stocks cop further losses on a bad day for global equities, while fears grow over the stability of emerging markets.

The big falls that we saw across global equity bourses on Friday held last night. In Europe, there were further losses: Dax off 0.5 per cent, CaC down 0.4 per cent and FTSE100 off 1.7 per cent. The bizarre thing is that this latest market wobble was caused by a lower tier data release: HSBC’s flash estimate of the Chinese PMI. A higher tier survey, the German IFO survey, showed that the business climate improved in Germany. The index rose to 110.6 from 109.5, well above average. This should have offered some support to European stocks, but conditions are turning in Europe.  

There are big fears over emerging markets. Both the Turkish and Brazilian central banks said that they may have to hike rates in response to market jitters, but the Brazilian central bank noted that the normalisation of global rates is actually a positive for the global economy and emerging markets in particular.

Over in the US, stocks had a better session of it – but only just. With about an hour to trade, the S&P500 is up 0.2 per cent, the Dow is 44 points higher and the Nasdaq is off 0.4 per cent.  

In the commodities space, crude fell, with WTI off almost 1 per cent ($95.7) and Brent off 0.9 per cent ($106.9). Copper was down 0.4 per cent and gold was off $10 to $1253. The US 10-year bond yield was a little higher overnight, maybe three basis points to 2.76 per cent, but this is still 10 basis points lower than Thursday.

In the currency space there is some good news for the Australian dollar. It has pretty much entirely recovered, following comments on Friday from Reserve Bank board member Heather Ridout. Ridout, a manufacturing lobbyist appointed by the ALP to the RBA Board and chair of Australia’s largest union-run super fund, said on Friday afternoon that the currency should be closer to 80 cents.  

Partly because of those comments, the unit dropped to a low of $US0.8661 on Friday night and is now back at 0.8755. These comments were remarkable for several reasons. Firstly they came two days after inflation data showed a sharp uptick in inflation. Investors should note that Ridout didn’t even mention inflation in the interview or house prices. Her sole focus was the Australian dollar.

Australia now faces a situation where inflation is at the top (on some measures above) the target band, house prices are rising fast and momentum is building–- and the only thing Ridout can think of is the dollar. She presented no research, empirical or otherwise, to support this target. She simply noted that it was the level she thought was fair.

Kim Carr was the first to publicly announce a target rate of about 85 cents. I can’t be sure whether her comments form part of this jawboning campaign, whether they reflect the general consensus of the board or even current government policy. But it matters because there are significant policy implications if they did. Ideally, this current government would ditch the exchange rate target; it is harmful and extraordinarily bad policy.

Other than that, the euro is little changed at 1.3672, GBP is about 70pips higher at 1.6580 and the yen is at 102.73.

Looking at the day ahead, the SPI points to a 0.4 per cent fall on our market today (so far) although the end result may not be that bad. There is a bit of buying momentum in US markets at the moment. Data-wise, we get NAB’s business confidence survey at 1130 and then Chinese industrial profits in December. Data flow tonight includes UK GDP, US durable goods, US house prices and consumer confidence.

Adam Carr is a leading market economist. See Business Spectator's glossary for definitions of technical terms used in SCOREBOARD articles.

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