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Europe moved little overnight, as did Asia. With the US on holidays for Labor Day no trade was seen and judging by Friday’s movements the below-par trade is likely to be reiterated tonight.
The question now is whether the ECB meeting in Frankfurt on Thursday will break the lull in trading activity across the world.
According to BNP Paribas, the movement in the bond markets, (now at record lows) suggests the market is pricing in a 50% probability that the ECB will cut its refinancing and deposit rates by 10 basis points or more.
This would mean bank deposits would be charged 20 basis points, from 10 basis points in a further push to get firms to distribute funds elsewhere. The key refinancing rate would be near enough to zero at five basis points (it could even make it zero), meaning borrowing in Europe would be close enough to free.
This will make the EUR the borrowing currency of choice, as the rates in the zone are now below that of Japan, meaning the yen is no longer the cheapest funding vehicle; in fact, the CHF has also overtaken it. The EUR remains the currency to watch over the coming weeks.
Having seen eurozone manufacturing continuing to slide overnight, anything short of strong action from the ECB on Thursday will see red for European bourses come the next full trading session.
Whatever the outcome of Thursday’s meeting, it should see volumes and trade funds returning to the markets. The current trade situation suggests the market is looking for clearer communication on the direction in which the ECB sees the eurozone heading. It is also felling out Mario Draghi and whether he is holding to his word in doing ‘whatever it takes’ to stabilise the monetary zone.
Ahead of the Asian open
Asian markets too have remained stable, despite some rather soft reads from China over the past week. This is interesting considering there has been a relatively low amount of news from the central government and PBoC about additional targeted measures, suggesting the market believes either or both will act in the near future. The other theory is that seasonality has yet to be completely shaken out.
I see the former as the mostly theory; maintaining its 7.5% GDP target is a key target and any form of threat to this will see the PBoC and central government switch gear. However, the reluctance to act is justified considering the central government’s desire to change tact on fiscal policy. The targeted responses are a clear illustration that policy is a blunt tool; for every two steps forward it is being forced to take one step back as it iron out issues.
Turning to Australia, and although it’s the first Tuesday of the month which that sees the release of the RBA’s interest rates decision and statement, no one is watching. All communication to date has clearly stated that until the ‘period of stability in interest rates’ is dropped from the statement, rates are on hold. Communication has also stated that once this is dropped, rates are likely to rise; however this is likely to be several months after the fact. In short, Australian interest rates are going to remain on hold until at least March next year.
What might snap Australian trade out of its lull is the GDP read tomorrow; anything that illustrates weakness is likely to see the six-year high read on the ASX being shed, and the numbers out from the mining and non-mining space over the quarter would suggest growth remains below trend.
We are currently calling the ASX 200 down six points to 5623 which indicates that the lull is not going to be broken today.