Banks lock in ‘lower for longer’ rates

The geo-political troubles of last month continue to slide off the front page; both Iraq and Ukraine are showing signs of reaching equilibrium in the respective conflicts, meaning the markets are refocusing on central banks. 

ECB
Source: Bloomberg

Russia overnight took the strongest step yet to de-escalate the situation, with President Putin declaring ‘Russia would stand up for itself but not at the cost of confrontation with the outside world’. This one sentence sent European markets rocketing higher as the conciliatory tone of the statement suggested Russia will back away. The de-escalation was enhanced when Russia’s 200 odd aid trucks crossed the border after meeting the demands of the Ukrainian government in Kiev, however interestingly they have stopped 20 miles from the border.

This morning, news has filtered through that incumbent Iraqi Prime Minters Nouri al-Maliki will step down and will hand over the Prime Ministership to deputy speaker Haidar al-Abadi. The fall in Brent crude on this news was telling. The October contract fell 2.9% to $102 a barrel, suggesting the market sees this change as one of action and that al-Abadi can broker a deal that will pass parliament to tackle the country’s issues. However al-Abadi has an immense task, as he now has to deal with the mass rise of the Islamic State. 

However with geo-politics off the front page, macro news is once more taking over and the debate around the Fed’s current monetary policy has promptly resumed. The weekly jobs claims last night surprised the market, jumping back above 300,000, as 21,000 extra people filed claims taking the weekly read to 311,000 versus an expected read of 295,000. This quickly resulted in street talk around the theme of ‘lower for longer’ from the Fed. This is becoming the catch cry for many major markets and the increase in jobless claims leaves expectations for a move in the Fed’s funds rate firmly on the back burner.

However, the US is not alone here; Australia, Japan and the EU are all in the same boat. Lower for longer looks increasingly likely in these economies as inflation, a word that we said would be the metric to watch come winter, is having a major impact. Negative wages in Australia; a technical recession in Italy; ZEW confidence figures and industrial production on a steep decline in Germany; Portugal crippled by the European debt crisis; European inflation stagnate and Japan seeing real inflation falling, despite current central government and central bank actions while its GDP is collapsing.

Central bank support is here to stay and it will continue to be the driving factor in market trade. 

Ahead of the Australian open

We are currently calling the ASX 200 up 0.44% to 5573; the strong recovery is pleasing to see, earnings season so far has seen most results ahead of expectations. Rio, Commonwealth Bank and Telstra have all beaten expectations. However, all three have expected differing market reactions.

What is apparent form the trading activity so far is guidance remains key to share price direction. The sell-off in CBA on Wednesday is the stark reminder that FY15 is likely to be tough and conditions are far from stable, and the growth seen in FY13 and FY14 is subsiding.

IGA, may distribute information/research produced by its respective foreign marketing partners within the IG Group of companies pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the research is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, IGA accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact IGA at 6390 5118 for matters arising from, or in connection with the information distributed.

This information/research prepared by IGA or IGA Group is intended for general circulation. It does not take into account the specific investment objectives, financial situation or particular needs of any particular person. You should take into account your specific investment objectives, financial situation or particular needs before making a commitment to trade, including seeking advice from an independent financial adviser regarding the suitability of the investment, under a separate engagement, as you deem fit. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. In addition to the disclaimer above, the information does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. Any views and opinions expressed may be changed without an update.

See important Research Disclaimer.