SCOREBOARD: Risk rebound

Markets pushed higher across the board on suggestions of aggressive Fed and ECB printing programs.

Another decent session for risk and stocks on both sides of the Atlantic pushed higher. We know the broad backdrop, the European Central Bank said it will start buying Italian and Spanish bonds if both countries first seek funds from the ESM/EFSF. By and large then the market is expecting both the ECB and the Fed to print endless streams of cash.

Indeed just last night we saw rabid comments made by Boston Fed President Eric Rosengren, who has taken the already radical approach of QE to a new and even more dangerous extreme. He suggests the Fed should launch an aggressive open ended printing program soon. Mainstream economics thrown out the window just there – but that’s the global trend. Loons are in the ascendency and you can get away with saying all sorts of rubbish it seems.

In any case it’s views like these (and maybe soft volumes) that helped the market overlook some weaker European data – German factory orders down 1.7 per cent in June, Italian June quarter GDP down 0.7 per cent (-2.5 per cent year on year) and UK industrial production down 2.5 per cent for the month of June after a 1 per cent gain. That data flow didn’t even seem to weigh and so the Dax ended 0.7 per cent higher, the CaC was up 1.5 per cent, while the FTSE was 0.6 per cent higher.

On Wall Street stocks bounced on the open and hit a high shortly after. At that point the S&P500 was up 0.9 per cent , but some profit taking saw some of these gains erased in subsequent trading. Still, the index did close 0.5 per cent higher (1401 and best since May), with the Dow up 0.4 per cent (13168) and the Nasdaq up 0.9 per cent.

Apart from tech stocks, energy and basic materials also had a solid session and were the key outperforming sectors. That’s largely due to the strong performance of commodities overnight. Crude for instance put on another 1.5 per cent to $93.6, which is that risk trade obviously, but there are also some other supporting factors such as hurricane Ernesto (which might threaten oil exports from Mexico) and then in Europe, maintenance work in the North Sea that is supporting Brent. Otherwise copper is up 1.3 per cent and gold fell slightly to $1614.

The flip side of the risk trade is that we saw US treasuries post a reasonable sell off, yields on the 10 year up about 7 bps to 1.63 per cent, the 5 year was up about 6 bps to 0.7 per cent, while the 2-year sits at 0.26 per cent. Aussie futures fell about 9 to 10 ticks with the 3s at 97.16 and the 10s at 96.73.

Now on the forex side, the Australian dollar is off slightly but not a lot following yesterday’s excitement. It currently sits at $US1.0554, which is about 20 pips weaker from yesterday afternoon. Now there’s obviously been a lot of press lately on the strength of the Australian dollar. Professor Warrick McKibbin has led a discussion about taking action against the strong currency and there’s been a bit of discussion since. For me, this isn’t a discussion we should be having with the unit where it is at the moment.

Regular readers may recall that I addressed this very issue a couple of years ago and indeed I am in favour of intervening in the forex market if it is warranted. That said, it isn’t at the moment. Firstly, and as I have addressed in these pages some years ago, the idea that the Australian dollar is crunching manufacturing and having an overtly negative influence on trade sectors is simply false. It is a lie and there is no evidence in support of it.

Then, it’s not clear that the currency is overvalued in any case. Our terms of trade is high and we have support from a sizeable interest rate differential (which we need). Our economy is strong and our unemployment rate low. Our currency should be strong. We have a freely floating currency, and instead of whingeing about it, we should take advantage of it – as a nation. Again, this is a severe failure of leadership through industry. It’s a genuine national crisis.

That said, if it was going to be done, McKibbin's proposal to print money is the most sensible and I suggested it myself two years ago. Those who propose we cut rates to weaken the currency forget that rates have been cut – and the Australian dollar is still strong. They don’t appear to understand that this wouldn’t work then. All the while excessively low rates would encourage imbalances to develop in the Australian economy. It would in sum be a stupid strategy that would risk long term damage to the economy.

Leaving that aside for the moment and looking at the day ahead – it looks like our equity market might be up around 1/25 if the SPI is anything to go by – 0.4 per cent higher (4268). Then major data released is new home lending which we get at 1130 AEST. The consensus is that lending will bounce 2 per cent in June. But otherwise there isn’t much.

Tonight we see German trade data, industrial production and the Bank of England’s inflation report, although this report isn’t really relevant to the market anymore. The BoE, recall, has failed to meet its inflation objective for many years and has consistently been wrong in forecasting inflation. Despite this, the Bank has still engaged QE. For the US, the major reports include non-farm productivity and unit labour costs.

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

@AdamCarrEcon on Twitter.

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