RBA language little changed

The positive momentum from US trade has not translated in to gains for Asia, with the major bourses struggling on the back of an alarming China HSBC services PMI reading. 

Source: Bloomberg

The July reading dropped to an all-time low of 50, and was down from 53.1 in June. There were some sharp falls in new business and outstanding business readings. Meanwhile, the composite PMI reading showed a drop in new orders, while the employment component rose. Analysts have mainly blamed the property slowdown for the poor readings. With recent manufacturing reports showing activity was expanding, it is disappointing to see services decline sharply.

Chinese equities have had a good run of late and perhaps this could lead to some profit taking in the near term. Japan’s Nikkei is also struggling today, with limited USD/JPY moves keeping sentiment at bay.

The US dollar has struggled to gain traction this week and not even comments by the Fed’s Lacker suggesting markets may be underestimating the Fed’s tighter pace were enough to trigger USD strength. Later in the US we’ll have the ISM non-manufacturing PMI along with factory orders data to look out for. With the market now becoming accustomed to strong US data, expectations will be relatively high heading into the release.

Cochlear leads on earnings

The ASX 200 spent most of the day on the back foot with a degree of caution ahead of the RBA meeting. Earnings got off to a mixed start with Cochclear (COH), Transurban (TCL) and Downer (DOW) kicking off proceedings.

COH got the biggest kicker out of earnings with a 10% rise, despite merely meeting FY14 guidance and not providing FY15 earnings outlook. TCL’s results were actually quite solid with good earnings and distribution growth. Meanwhile DOW continues to struggle on the back of a struggling mining sector, which has resulted in subdued work in hand.

Tomorrow is relatively quiet on the reporting front with OzForex the only company reporting. However, things will pick up on Thursday when we get Rio Tinto’s half year earnings.  

AUD relatively unchanged on RBA

AUD/USD was also sidelined heading into the RBA decision, but has since seen some mild strength on the back of the accompanying statement. There were some small changes to the statement including dropping the line ‘slowed a little earlier in the year’ referring to China’s growth and reinforcing it remains in-line with policymakers’ objectives. While inflation has increased, the RBA feels growth in wages has declined noticeably and is expected to remain relatively modest over the period ahead. All up, a well-balanced neutral statement and the period of stability in rates seems prudent.

Regarding the currency though, perhaps the lack of shift in language will let risk dictate the AUD’s moves in the near term. Those hoping for further jawboning would have perhaps been disappointed and this could play into the hands of the bulls.

Europe in for some gains

Looking ahead to European trade, we are calling the major bourses modestly firmer with the majority set to bounce back from yesterday’s benign performance. The PSI was a significant outperformer yesterday with the Banco Espirito Santo EUR4.9 billion bailout triggering the gains. Peripheral bond yields cooled with the Portuguese 10-year bond yields falling seven basis points.  Should this momentum continue in today’s session, there is a good chance we’ll see European equities look to play catch-up.

The single currency has not done much at all and just remains sidelined against the greenback a smidge above 1.3400. Services PMIs will remain in focus with readings for Spain, Italy and the region due out. We also have July retail sales due out with the market expecting a 0.4% bounce.

Cable facing some resistance

The pound gained some traction from the improving risk sentiment and better-than-expected construction PMI data. GBP/USD found some support in the 1.6800 region last week and seems to have generated some buying interest. Having said that, it is now approaching a downtrend resistance which has been in place since the mid July highs, and has capped the price action since. This line currently comes in around 1.6880 and is likely to be tested at some point in the near term. On the UK calendar we have services PMI due out with a solid improvement expected. 

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