No Carney-vale for GBP

The UK’s Super Thursday eliminated hopes for a BOE rate rise in 2015.

BOE
Source: Bloomberg

The recent strength of the pound explicitly weighed on members’ considerations, with only one member voting to increase the policy rate. The GBP did not take this well, declining against most of the majors.

The BOE’s reaction to the strong pound may also have been a consideration for the USD. Investors may be wondering if recent USD strength could also stay the Fed’s hand for a September rate rise, and we saw slight weakness in the USD overnight.

Despite USD weakness, further declines in oil overnight are increasing, cementing the case that it is supply factors rather than US dollar strength that is most concerning the market at the moment.

US equities also had a poor session with all indices down after disappointing results from Viacom and Twenty-First Century Fox. Big declines were also seen in Biotech, with the Nasdaq Biotechnology Index dropping 4%.

There are concerns the S&P 500 may be set for some major declines as rallies are seeing less volume behind them. The media sector has been the second-best-performing sector in the six-year rally in US equities, so it is quite worrying to see its big drops after Disney’s earnings in the previous session, and now Fox and Viacom. The recent declines in Apple, arguably the most representative bellwether stock of the whole index, are also adding further negative sentiment for the index going forward.

Asia will be keenly awaiting the BOJ meeting today. Japan is a long way off hitting the BOJ’s inflation target of 2% by the middle of 2016 and we also had a miserable labour cash earnings number in the past week. The market will be paying keen attention to any language that might be presaging a further increase in the BOJ’s QQE program, with a number of analysts calling for it to be stepped up at the October meeting.

In Australia the big news today will be the RBA’s Statement of Monetary Policy, set to be released at 11.30 am AEST. After the RBA meeting on Tuesday largely took any further cuts to the policy rate off the board for the rest of the year, keen attention will be paid to growth and inflation forecasts.

Governor Glenn Stevens’ recent comments that Australia’s potential growth rate may be below the previously claimed 3-3.25% has led to speculation of what level of growth the RBA is now targeting. Estimates vary around 2.7-2.9% and, if the RBA lowers it growth forecasts to levels significantly below that, it may bring back the possibility of further rate cuts in the coming months.

The ASX at the open

Rio Tinto’s earnings numbers came out yesterday after market close and investors will be buoyed by further reductions to capital investments and an increase to their expenditure cutting target for this year from $750 million to $1 billion.

Underlying earnings shrank 43% from last year to $2.9 billion, beating the consensus of $2.4 billion.

These are all bullish signals for the stock. The only concern from some groups of investors is CEO Sam Walsh’s continued defence of its progressive dividend policy, with its interim dividend increasing 12% to $1.075. Many don’t believe a progressive dividend policy is appropriate for a mining stock, and think capital would be better served by focussing on counter-cyclical investment.

When you look at the movement in the iron price over the past month, projections for stepped up Chinese fixed asset investment in 2H and RIO’s position against its competitors, it is probably the top pick of mining stocks to own at the moment.

It will also be interesting to see if there is any spillover to other mining stocks, with FMG seeing strong rallies this week following news a Chinese group were planning to buy their infrastructure assets.

Banks to lead further ASX declines

But the ASX as a whole is looking at more declines today. After breaking above the key 5700 level earlier in the week, some key lows look set to be tested. Breaks below 5550 could see it pushing down to 5450 levels before buying support comes through.

Keen attention will also be paid to the big banks today. ANZ halted its stock yesterday after announcing a $3 billion capital raising. This turned attention to the other members of the Big Four banks; all of them will have to make provisions in order to be in line with APRA’s new regulations of a 10 per cent cap on investor lending.

CBA dropped over 3% yesterday and they are reporting earnings on Tuesday. There will be a lot of speculation that they may announce further capital raising along with that release, and concerns over this are likely to continue hitting the stock today. And ANZ’s stock is looking to take a big hit when it returns to the market today.

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