SCOREBOARD: Risk on!

It all started yesterday. Chinese authorities pledged to support economic expansion, with a particular focus on infrastructure. Aussie stocks surged over 1 per cent. During that session, or maybe just before, one member of the Fed's gang of three (the main policy extremists – Bernanke, Yellen and Dudley) reiterated that QE wasn't about to be altered any time soon and that markets – and Obama – could look forward to super-stimulatory polices for a long time.

An index then comes out (services ISM) showing an unexpected pick-up in the non-manufacturing sector. The index rose to 56 from 55.2, above an expected 55. Given that the average is 53, this is showing above-trend growth – not bad for an economy that is roughly 80 per cent services based.

If you think that's enough good news for any one session though, you'd be wrong, because over in Europe the Italian president is considering forming a new technocrat government, if Bersani (who holds a majority in the house) fails to form government. Not great for democracy but great for the markets – well, kinda.

Anyway, eurozone retail sales surged 1.2 per cent – four times the expectation. Not surprisingly then, European stocks had a strong session, with the Dax and CaC shooting up 2.1 per cent, the FTSE100 1.4 per cent higher and stocks in Italy 2.8 per cent higher. Italy's 10-year yields dropped 1 bp to 4.67 per cent.

From a Wall Street perspective, all the planets were aligned – risk on! The Dow itself is now at a record high, and the S&P500 isn't too far off from that. With about an hour left to trade the Dow is up 137 points (14,265), the S&P500 is 0.9 per cent higher (1539), while the Nasdaq is 1.2 per cent higher (3220). All sectors had a strong session, but industrials, tech and financials outperformed. Fairly solid stuff. Having said that, commodities were a little more subdued, especially gold, which was up smalls $3 to $1575. Crude then rose 0.8 per cent ($90.83), while copper was 0.6 per cent higher.

On the rates side, US Treasuries did little, with the 10-year yield up about 2 bps to 1.89 per cent. The 5-year is at 0.77 per cent, while the 2-year sits at 0.25 per cent. Aussie debt futures were then off 4-5 per cent with the 3s at 97.19 and the 10s at 96.655.

As for forex, the Australian dollar was reasonably steady from 1630 AEDT at 1.0245, and same for the euro at 1.3039 and British pound at 1.5116. Then rose to 93.3 from 92.96.

There's not really too much else to discuss. A great session all up, which saw European and US stocks at their highest in about four or five years. Think of the mood in Australia now where people are constantly talking everything down – give it up, people! Anyway, the SPI suggests Aussie stocks will only rise 0.4 per cent today.

So turning to the Reserve Bank yesterday, the decision wasn't a surprise and the statement itself didn't really tell us much. The board reckons that the inflation outlook "as assessed at present" would allow them to cut rates if it were needed. But really that's a nothing statement. The only aspect that really surprised me was the way the board completely ignored recent events – the capex data in particular, or even the change in sentiment.

Of particular importance, they still maintain the view that we are at the peak of the mining investment boom, despite the recent capex survey showing quite clearly that this wasn't the case. The board shouldn't be ignoring data. They're not really in a position to, given their track record in picking the global and domestic state of play – it's been atrocious. But, the fact that they continue to do this suggests to me that it wouldn't take much for them to cut again.

My general observation is that the board are seeing the economy through the prism of the housing and manufacturing sectors, rather than looking at the big picture (or the remaining 85-90 per cent of the economy), which of course predisposes them to cut. Recall last year they cut rates because iron ore prices fell. That they subsequently rebounded seemed not to matter. But that's how the board rolls at the moment: doing whatever they can and cherry picking data to justify why rates can be lowered.

Today the key macro release for Australia is fourth quarter GDP (1130 AEDT). Trade data yesterday suggests net exports will make a strong contribution to growth. Prior to that data everyone was looking for something like 0.6 per cent quarterly growth. Given the strength of our exports and the mining boom, we might see something in the order of 0.8 or 0.9 per cent.

Outside of that we see the fourth quarter eurozone GDP breakdown tonight. Then for the US we see the ADP employment report, the Beige Book and factory orders.

Hope you have a great day…

Adam Carr is a leading market economist.

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