Yesterday was all about global manufacturing as investors responded to a raft of manufacturing PMIs, which mostly showed further weakness. Germany’s manufacturing Purchasing Managers Index (PMI) was downgraded into contractionary territory and now stands at 49.5. Moves in commodities were quite dramatic to say the least, with big ranges for the likes of silver, gold and oil.
In fact, the only commodity that struggled was iron ore. After a woeful performance yesterday, the ASX 200 has reversed sharply with resource-related stocks coming back to life after yesterday’s sell-off. The energy space is predictably leading the recovery but there continue to be questions around whether this is merely a dead-cat bounce.
Given the wild swings we saw yesterday, this could certainly be the case and I don’t think anyone would be surprised to see these gains reverse again tomorrow. As a result, I think investors should exercise extreme caution and refrain from premature bargain hunting. Should some stability and sustained recovery be on the cards, then investors will have ample time to play catch up in the sector.
The reality is global growth concerns are a real threat and, unless central banks step up easing efforts, things are likely to get worse before getting better. Such a situation is not positive for commodities, making the investment case in resources difficult until we see a sustained recovery. In the materials space, gold names have been a notable outperformer today but iron ore stocks remain subdued despite iron ore futures ticking higher.
RBA remains on hold but calls for a cut grow
The other major point of consideration in Asia today has been the Reserve Bank of Australia (RBA) meeting. With conditions remaining subdued, we already know the RBA is in no hurry to hike. All the commentary the RBA has been providing has been centred around what it will do once it prepares a shift to a more hawkish bias.
However, it seems there hasn’t been anything suggesting what it would take for the central bank to look at easing further. Regardless, the key issues the market feels will determine the RBA’s next step are the AUD, property prices, the east coast’s economy and key commodity prices. In the event that the AUD remain highs by historical standards, property prices stay moderate, key commodities deteriorate further and the east coast economy doesn’t pick up enough to drive renewed growth, then the RBA’s hand will be forced.
Analysts are increasingly calling for cuts. If this come to fruition, the AUD is likely to be trading much lower in the medium term. Deutsche Bank has been the most aggressive and is now calling for 50 basis points’ worth of cuts next year. The broker feels its expectation of an increase in unemployment peaking at 6.75% in 2015 will be consistent with rate reductions.
Flat start for Europe
Ahead of the European open, we are calling the major bourses relatively flat. Yesterday’s trade was fairly busy, with investors focusing on manufacturing PMI readings. Today’s session is not quite as busy but Spanish unemployment and UK construction PMI will deserve some attention. The rest will be all about the build-up to the two policy meetings this week, where analysts are not expecting any change from the Bank of England nor the European Central Bank.
Over in the US, we might continue to see a reaction to Black Friday sales and Fed commentary is also likely to be a highlight. Federal Reserve members Yellen, Fischer and Brainard are all set to speak and we get data, including construction spending and total vehicle sales. Fischer already spoke yesterday and said he sees a significant chance wage inflation is about to pick up.