Scoreboard: Pause button

Markets took a breather from their rally overnight, with a big move in crude leading Wall Street into the red.

There was little in the way of news or commentary last night, yet markets have decided to take some risk off the table nevertheless. I don’t really see a clear catalyst for it, although some moves were sizeable.

Copper for instance fell 2.2 per cent overnight and crude was down 1.5 per cent to $96.82. This is the lowest level for crude since about June with losses of about 13 per cent over the last six weeks or so.

Seasonal maintenance of some refineries could be the issue here as the shutdown has seen a lift in crude stocks – the EIA reporting last night that stockpiles rose 5.2m barrels in the week to October 18. Moreover the spread to Brent is the highest since about April at $13, although Brent itself was down over 2 per cent last night (down about 7 per cent over the last six weeks).

The big move in crude then weighed on energy stocks on Wall Street, which as the key underperforming sector, helped to keep the major indices in the red. With about 20 minutes or so left to trade, the S&P500 was down 0.5 per cent (1745), the Dow fell 65 points (15,402) while the Nasdaq was off 0.7 per cent (3902).

There’s not really too much else, although moves in the Australian dollar are interesting. After yesterday’s CPI the unit rose about half a cent, only to fall about 1 cent in afternoon trading – currently at 0.9628 or little changed from yesterday at 1630 AEDT.

Whether the slump was due to rumours of rising problem loans in China or news that the Reserve Bank is being recapitalised (to weaken the Australian dollar) or unofficial rumour mongering and selling – isn’t clear.  But it was unusual, as euro is little changed at 1.3779 (low of 1.3744), while yen is at 97.34 (virtually unchanged).

As for those CPI numbers we saw yesterday, there are two things to note. The clear upswing in inflation we saw was a bit of a problem. It’s not that inflation is in a danger zone or anything yet – it isn’t – although underlying inflation is certainly higher than the 2.3 per cent rate shown in the ABS statistics.  My analysis shows it – at a minimum – around the middle of the target at 2.5 per cent – if not a little higher.

A prudent central bank wouldn’t even dream of cutting rates again, or even talk about it, but I suspect they are still toying with the idea given the recent appreciation on the exchange rate. For mine, this only serves to illustrate the dangerous game policy makers play. Especially, and on any objective analysis, they’ve done more harm than good (smashing confidence in the process).

With the cash rate at record lows, Australia is exposed to an unexpected lift in inflation – asset and consumer. That’s especially given the absence of any real downside risks and the substantial upside risks to global and domestic growth.  That is no way to conduct policy in my opinion  – the risks are too high. 

Bits and pieces then – and most of it to do with Europe (Big government makes Europe a no-grow zone, October 24). Firstly, it looks like Spain might be out of a recession, although only just with growth up 0.1 per cent for the third quarter. But it’s a start! Otherwise the BoE have suggested it may not ease further, although a tightening of policy is a long way off. The Bank noted that the unemployment rate was lower and growth faster than they had predicted, but there was no hint in the minutes that they would change previous guidance for the first rate hike sometime in 2016.

For the day ahead, the SPI points to a very quiet session today – 4 point gain. Otherwise there is a Chinese manufacturing PMI at 1145 AEDT, the European PMIs then follow tonight, while US data includes jobless claims and new home sales.

Have a good one… 

Adam Carr is a leading market economist.

Follow @AdamCarrEcon on Twitter.

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