Another day and another record for Wall Street. Having taken a breather while the crisis in Cyprus played out, it looks as though it's game on again.
European markets in particular posted strong gains last night – the Easter bunny must have been good to people. Leading the pack was the CaC – up almost 2 per cent, with the Dax not too far behind that at 1.9 per cent. Spanish and Italian stocks were up 1.7 per cent and 1.4 per cent respectively, while the FTSE100 rose 1.2 per cent.
Happy days are here again and it all has to do with Cyprus. Firstly, it doesn’t look like the Cypriot move sparked a wider bank run across the continent, as some thought it would. The idea was that people would start fearing for the safety of their bank deposits all through Europe.
Indeed the Cypriot government is looking slightly more relaxed about its own deposit situation and took step to ease capital controls. Specifically, the limits on business transactions have increased to €25,000 from €5,000 and people can write cheques up to €9,000. Added to that, deposit holders would now be able to withdraw up to 10 per cent of their savings over €100,000 – and if that wasn’t enough, the Troika extended by 1 year to 2017 the deadline for Cyprus to meet its budget targets.
Over in the US, there was less enthusiasm for these moves, but then the US barely reacted to Cyprus anyway. Hardening up. Still, it wasn’t a bad session and as I write the S&P500 is 0.5 per cent higher (1570), the Dow is 0.4 per cent higher (14640) and the Nasdaq is up 0.3 per cent (3250). It could have been stronger given the data, I’ll admit – factory orders surged 3 per cent in February and car sales also spiked with Chrysler, Ford and General Motors reporting their strongest sales growth in five years. Not bad though, and those stocks outperformed the major indexes.
Now the flipside of all of this is that gold took a beating – off $25 to $1575. Good news out of Europe means there is less likelihood that central banks will print further (supposedly) and there was some rhetoric to that effect from Atlanta Fed President Lockhart (non-voter) who said the Fed may ease off on QE late this year/early next.
Similarly, rumours are floating around that the Fed is actively selling gold to drive it lower. Not to mention probes into market manipulation of the silver and gold markets – there is official pressure here. Commodities elsewhere were weaker, with crude down 0.3 per cent ($96.9) and copper off 0.1 per cent.
For the remaining price action there wasn’t much: the Australian dollar was little changed at 1.0444, the euro is about 50 pips lower (1.2515) and the US dollar is buying more yen in the lead up to the Bank of Japan meeting today – now at 93.44 from 92.82. US Treasuries then sold off a bit, with the US 10-year up 4 bps to 1.86 per cent. The 5-year is at 0.77 per cent and the 2-year at 0.24 per cent.
As for the Reserve Bank's decision to hold rates steady yesterday, we really didn’t see any surprises from the decision to hold or in the accompanying press release. It’s clear the easing bias remains in place with the board stating, “The inflation outlook, as assessed at present, would afford scope to ease policy further, should that be necessary to support demand.”
However there wasn’t much in the remainder of the document for investors. The Reserve Bank has missed the state of play – or its 'nowcasts' – for some time. But they’re not alone in talking as if the economy came from some point of weakness last year and has only just started to recover. This is simply not true and it has cost investors money.
Truth is, the domestic landscape is little changed from last year – house prices are the key difference, and that’s got very little to do with the price of money and everything to do with a huge shift in rhetoric. People are no longer bombarded day and night with talk that the eurozone is about to collapse and the US double dip. The investment boom is quite obviously not even close to ending and forecasts for a surge in the unemployment rate have proven to be wrong. The list goes on and people are more optimistic as a result. Otherwise, all the signposts for strong growth were in place last year – that’s why equities continued to rally then. So to talk as if this is all just so very sudden is a little slow.
Bits and pieces otherwise – on the news front, Cyprus' finance minister quit to deal with a judicial probe into how the Island was driven to a near financial catastrophe. He was chairman of the country’s second largest bank during the heydays.
Then for the data, the European unemployment rate was unchanged at 12 per cent in February, although Italy’s rate fell slightly to 11.6 per cent from 11.7 per cent. German inflation was then unchanged just below the maximum target of 2 per cent, at 1.8 per cent in March.
For today, the SPI suggests Aussie stocks will rise 0.3 per cent. Not a lot for Australia otherwise, aside from new home sales and trade data at 1130 AEDT.
What might be more interesting is the Bank of Japan is meeting today and expectations for something drastic are high. The remit is 2 per cent inflation and to print like crazy until that is achieved. The bank's new governor has been a little circumspect recently though, concerned that maybe 2 per cent inflation was a little ambitious. I’ve suggested this before but I think the Reserve Bank of Zimbabwe might have to send an aid delegation to Japan.
Fact is, if you can’t get inflation under a fiat currency regime, you’re just not trying hard enough. Remember that under fiat currency, deflation is always and everywhere a deliberate policy choice.
Outside of that meeting we get the Chinese non-manufacturing PMI at 1245 AEDT. Eurozone inflation follows tonight and then for the US we see the non-manufacturing ISM and ADP employment reports.
Have a good one…