RBA pushes the Aussie higher

The Statement on Monetary Policy (SOMP) failed to dramatically lower the RBA’s forecasts.

Source: Bloomberg

GDP growth estimates for year-end 2016 were lowered by 25 basis points to 2.5-3.5%. Underlying inflation forecasts were also raised 25 basis points to 2-3% for June 2016. The RBA was surprisingly upbeat about employment, expecting little change in the unemployment rate over the next 18 months before declining in 2017. Housing loan growth was also mentioned with investor loans declining, while owner occupier loans increased, clearly showing APRA’s new requirements are working. This helps reduce the probability of any housing market induced financial instability.

Taken in view of the RBA policy decision on Tuesday, it seems rate cuts have been taken off the board and expectations are now for a prolonged hold with rates at 2%. The AUD rallied 24 pips on the release up to 0.7374 and we look so be seeing some stability at this level with any future moves downwards likely to be driven by developments in the US, as the Fed approaches a potential September rate hike.

Further ASX declines

Headwinds overnight (with falls in European and US markets) were already pointing to further declines in the ASX 200 today and they have conspired with a range of domestic factors to pull the market down 1.6%.

As you can see in the chart, the ASX has formed a perfect double top pattern in recent weeks after its failure to break through the 5700 level and hold it. If the ASX closes below the 5520 neckline of the double top, the technical target for the index would be a decline to the 5335 level – a 6.4% decline from its recent high on 5 August.

Click to enlarge

Aussie banks have driven the index lower again. ANZ returned to the market today after halting its stock yesterday upon the announcement of a $3 billion capital raising in order to bring it towards APRA’s capital equity tier 1 (CET1) requirements of 10%. After the other three major banks bore the brunt of investor unhappiness about the prospects of further capital raising yesterday, ANZ has dropped over 7% - even lower than its equity placement level in the capital raising of $30.95.

CBA and WBC also saw declines over 2% today.They are also the two of the Big Four that have the furthest to go on reaching APRA’s 10% CET1 ratio requirements, their ratios standing at 8.4% and 8.5%, respectively. CBA comes out with its earnings report on Tuesday and in order to start working towards its 10% target, analysts are expecting a significant capital raising announcement. This is likely to keep pushing the stock down on Monday.

Despite Rio’s solid earnings report, miners and mining related businesses were all affected after Orica (ORI) provided guidance that its NPAT for FY15 would be 10-15% lower than the consensus forecast of $490 million. ORI stock price declined over 16%, and its negative outlook on the mining explosives sector seemed to hit sentiment for the materials sector as a whole. Orica is struggling in a heavily oversupplied ammonium nitrate market with competitors continuing to ramp up production. This bares a remarkable similarity to the plight of many other companies in the resources sector. It’s no surprise that such a price drop has had negative spillovers other sectors in the market.

Virgin’s (VAH) earnings came in right on target, with announcements that it expects to return to profit in 2016 after discontinuing a number of unprofitable international flights leaving the stock price largely unchanged.

Iluka (ILU) announced guidance that it would undershoot earnings estimates seeing its stock price decline 3.2%.

With the Big Aussie banks in for further hits next week, as investors start pricing in their capital raising needs, the ASX is looking to more declines.

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