The cheap money effect

Friday’s session on the ASX was something to behold, as it was the largest intra-day move since 16 December.

ASX
Source: Bloomberg

However, the difference between then and Friday was that on Friday the ASX saw $7.3 billion trading hands – 10% above the 10-day moving average and 45% above the yearly daily average.

I see three reasons for the rally:

  1. Energy prices: WTI jumped back above US$50 a barrel and added another 3% on Friday, meaning the heavily-shorted energy space snapped back with strength. It’s likely to be part of the rally today.
     
  2. Rio’s numbers: The debt reduction at Rio Tinto is something Sam Walsh can be very proud of. The stability in the balance sheet now gives him a point of strength and puts Rio on a very solid footing to navigate the ‘new world’ in iron ore. The results suggested that BHP should deliver something similar and the 6.5% move in the company dragged BHP up 4.5% on expectations of a similar result.
     
  3. Stevens’ testimony: Cheap money is coming.
     

It’s the final point that was really telling. In my opinion, Glenn Stevens’ testimony to the Standing Committee confirmed three major points:

1) Non-mining investment is well short of expectations at this point in the cycle and needs further assistance.

2) Monetary policy may be less effective than it once was but should still be part of demand creation.

3) Housing was a concern (particularly in Sydney). However, macro-prudential tools could mitigate a housing run on, allowing rates to move further.
 

There is some debate as to whether he signalled another imminent rate cut. I found the most poignant remarks around further rate moves were, ‘the board felt that in the current environment, with below-trend growth and unemployment rising, we felt that we had the capacity to support the economy and that is what we did at February’s meeting’. The market’s reaction to this statement was clear – further reductions in the cash rate are coming as unemployment hit a 12-year high and growth expectations were downgraded.

The counter-argument from the analyst world was that the testimony went to great lengths to downplay the idea that further cuts were imminent to reduce volatility. This was clearly summed up by a rather comical exchange between Labor MP Ed Husic and Glenn Stevens when he was pushing the panel for further explanations as to the reason for the February cut.

Husic: ‘I feel like I’m interviewing the Sphinx’

Stevens: ‘You have no idea how boring I can be’

The interbank market, however, wasn’t fooled by Steven’s deadpan riddle-laden speech at the close of Friday’s market, suggesting there is a 66% chance of a rate cut in March.

The prospect of further reductions in the cash rate saw all four major banks adding 2% or more on Friday. Telstra added 2% and CSL came rocketing back after sliding results. The yield trade is alive and well.  

As I stated on Friday - the lower rates will push bond and simple money market instrument (such as term deposits) holders into the equity market as they look to maintain above-inflation returns on a per annum basis. Although the market is currently stretched on a P/E basis, the environment is likely to see this ratio remaining elevated. I see ‘fair value’ between 5650 and 5700 under the current conditions, but 5800 to 5850 isn’t out of the question if rates fall to 1.5% or lower.  

Ahead of the Australian open

The rally from Friday looks set to continue. Europe bounced as a Greek deal continues to edge closer to reality (the DAX touched 11,000 points on Friday night). Domestic news is also thin on the ground for most of the week, which will give Friday’s rally a further chance to run.

Based on the futures market from Saturday, we are calling the ASX up 32 points to 5910 (a new six-year high). The rally is likely to be broad-based. However, it’s the yield trade that will be the main supporter of the rally.

Denne informasjonen er utarbeidet av IG, forretningsnavnet til IG Markets Limited. I tillegg til disclaimeren nedenfor, inneholder ikke denne siden oversikt over kurser, eller tilbud om, eller oppfordring til, en transaksjon i noe finansielt instrument. IG påtar seg intet ansvar for handlinger basert på disse kommentarene og for eventuelle konsekvenser som et resultat av dette. Ingen garanti gis for nøyaktigheten eller fullstendigheten av denne informasjonen. Personer som handler ut i fra denne informasjonen gjør det på egen risiko. Forskning gitt her tar ikke hensyn til spesifikke investeringsmål, finansiell situasjon og behov som angår den enkelte person som mottar dette. Denne informasjonen er ikke utarbeidet i samsvar med regelverket for investeringsanalyser, så derfor er denne informasjonen ansett å være markedsføringsmateriale. Selv om vi ikke er hindret i å handle i forkant av våre anbefalinger, ønsker vi ikke å dra nytte av dem før de blir levert til våre kunder. Se fullstendig disclaimer og kvartalsvis oppsummering.

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Denne informasjonen er utarbeidet av IG, forretningsnavnet til IG Markets Limited. I tillegg til disclaimeren nedenfor, inneholder ikke denne siden oversikt over kurser, eller tilbud om, eller oppfordring til, en transaksjon i noe finansielt instrument. IG påtar seg intet ansvar for handlinger basert på disse kommentarene og for eventuelle konsekvenser som et resultat av dette. Ingen garanti gis for nøyaktigheten eller fullstendigheten av denne informasjonen. Personer som handler ut i fra denne informasjonen gjør det på egen risiko. Forskning gitt her tar ikke hensyn til spesifikke investeringsmål, finansiell situasjon og behov som angår den enkelte person som mottar dette. Det er ikke utarbeidet i samsvar med lovens krav for å fremme uavhengighet av investeringsanalyse og som sådan er ansett av å være markedsføringskommunikasjon. Selv om vi ikke er hindret i å handle i forkant av våre anbefalinger, ønsker vi ikke å dra nytte av dem før de blir levert til våre kunder.