Hurricane Sandy made landfall yesterday and of course US markets were closed for the second straight day. So far we’re looking at 35 fatalities and while the storm has passed the clean-up could take the rest of the week in some areas. Eight million people have lost power in the wake of the storm and while most of those are in New Jersey, New York and Connecticut, the outages extends as far as West Virginia and Ohio. For New York City, the latest reports suggest that some parts of the subway system won’t be fully operational for the rest of the week, or most of it. For now then it’s about cleaning up and restoring services. The major exchanges report they will be open tonight so it will be trading as usual – if people can get to work.
Now while markets didn’t trade we did see some economic data and the flow continued the recent positive trend. In particular, house prices were up 0.5 per cent in August according to S&P/CaseShiller to be 1.9 per cent higher annually. Similarly, consumer confidence rose to 73 in October from 70 according to the conference board (average 91).
Through the carnage, European stocks actually shot up – with the Dax up 1.1 per cent, CaC up 1.5 per cent, while the FTSE was 0.95 per cent higher – on a combination of several key events. In the corporate space, Deutsche Bank announced big gains in investment banking revenue which saw that stock up 4.5 per cent. Investors also took as positive, moves by Swiss bank UBS to largely exit fixed income operations at its investment bank – and fire 10,000 staff. Outside the finance space, BP recorded a strong third-quarter profit.
Then we had some news out of Greece – not that Greece really matters much anymore. The contagion happened. But apparently Greece has reached a deal with it creditors, although it has yet to get through parliament (recall there is a fragile coalition of three main parties). But, in order to get the next instalment of aid, Greece must enact an additional €13 billion in spending cuts and tax measures – and implement 89 previous agreements that it as yet hasn’t.
The fact there was an agreement at all helped sentiment though, as did strong demand at an Italian bond auction. The Treasury sold €7 billion of bonds (5 and 10 years) at the lowest yields in over a year. The 10-year went out at a yield of 4.92 per cent, compared to 5.24 per cent last month, while the 5-year was at 3.8 per cent from 4.09 per cent previously. Even the euro managed to find a bid, up just under 60 pips to 1.2960.
There wasn’t really much else to say for the price action. Commodities did little on light volumes and were largely flat – gold at $1710, crude at $85. Otherwise the Australian dollar is about 30 pips or so higher – to $US1.0364.
Bits and pieces otherwise. The BoJ eased policy for the second month in a row, printing trillions of yen, largely to weaken the currency against the US dollar. Note that the yen did little and is at 79.62. Officially it’s because they need more stimulus to meet their inflation target.
In terms of the deputy RBA governor's speech last night I have to say I thought it was much needed for the Australian market – a good speech.
Initially, I think there were plenty of people who thought the speech was backing lower rates to weaken the Australian dollar. Certainly the newswires were reporting that as well as some of the twitterati – fools rush in. It’s true that Phil Lowe did note QE in the major economies is putting pressure on other economies to have lower rates, given the pressure QE was putting on the exchange rate. This is true and you are seeing that with the BoJ and the Swiss National Bank. The same pressure is being applied by lobbyists for the Reserve Bank to follow the same path.
He did say in his speech however, that the bulk of the Australian dollar strength was due to higher commodity prices, which would seem to imply that rate cuts weren’t the answer. This was made more explicit in the Q&A, where it became quite apparent that the RBA sees no need for policy to weaken the currency. As I have highlighted in these very pages and as Phil Lowe said himself last night, "the currency is still not at a point where I think you can make a strong conclusion that it is fundamentally overvalued… the argument for doing that (intervening) would arise if we thought the currency was fundamentally overvalued and was having a really adverse effect on the Australian economy.” As regular readers will be aware I 100 per cent agree with this, although I would add that if we ever get to that point lower interest rates are not the answer: they haven’t worked thus far and needlessly expose us to future imbalances. The Reserve Bank would have to print money – this is the best option and it is costless.
Otherwise for the data, the German unemployment rate was steady at 6.9 per cent, while Spain’s GDP fell 0.3 per cent in the third quarter after a 0.4 per cent fall in the second quarter. Not much else.
Looking at the day ahead, the SPI suggests the All Ords will be up 0.5 per cent today while Aussie debt futures were down 4 ticks on the 3s (97.45) and 2.5 ticks on the 10s (96.92). Then we get two key data releases for Australia, being private sector credit and building approvals (both at 1130 AEDT). There isn’t really too much for our region, and so the main focus will be on data tonight. This includes eurozone employment figures and a couple of 32rd tier manufacturing releases (Milwaukie and Chicago PMI).
That’s about the lot, hope you have a great day…