Rates held, but cuts still likely

There has been a marked increase in the use of the term ‘bubble’ in various asset classes over the past 24 hours. Some of the concerns are justified in my opinion, some not.

Source: Bloomberg

In Australia the word ‘bubble’ has been used fairly liberally of late around the domestic housing market, although today’s super-strong building approvals print could alter that perception somewhat on the idea there is new supply coming on to the market.

It seems the moves in property have been the key reason why the Reserve Bank of Australia left rates on hold, with the central bank openly talking about the strong rise in property prices in Sydney. Increased regulation around the housing market will be hurried through and, subsequently, the RBA can get on with adjusting the cash rate lower.

In the US, the fact the NASDAQ composite has broken through 5,000, bringing comparisons with the dot.com era, but I personally think this is misplaced. Naturally, there are names which are far too punchy and have been trading on crazy valuations for a while. Recall mid-way through last year Janet Yellen actually made mention of this and singled out social media and biotech names. Nothing has really changed here and, as long as traders understand the risks around these names, then all should be well. A company like Apple, which is likely to grow its earnings over 30% this year and 8% into 2016 while reducing debt and consistently increasing its dividend over the coming three years, is not in a bubble.

The fact that central banks have actually only just started their global push to direct funds into equities to create a real wealth effect keeps me bullish, although they still need to keep bond yields low in the process. Low inflation will help here, but there are some signs that the global economy is showing signs of life. US data has deteriorated somewhat of late, but the Federal Reserve will put this down to factors like the West Coast port dispute and there is still more of a fiscal boost to come from the low gasoline prices. Europe and Japan are seeing signs of life, although it is still tentative. Heaven forbid if either central bank can’t manufacture inflation at some stage in 2016.

There hasn’t really been a strong pick-up in shorting activity from clients today despite increased commentary saying assets had far removed themselves from economic reality. Asian markets have all been offered today and this could mark the start of a change in trend – I think we should watch price action from here, especially with regards to China.

The real action in Australia has naturally come after RBA failed to live up to the modest consensus of easing rates. AUD/USD rallied around 70 points, although there was a suspicious 40-point uptick even before the news. The ASX 200 fared worse, though, testing 5900 in the process as much of the disappointment was naturally expressed in the yield plays.

Much of moves were capped by the fact the RBA changed the overall message to contain an explicit easing bias, therefore buying themselves time. Still, some will see this as the right outcome, others not so, but certainly this will do nothing to bring down a ‘fundamentally’ high AUD. From this point, they had a perfect opportunity to push the trade-weighted AUD lower.

If there are bubbles appearing in markets then the RBA will probably be the first to act. They have clearly weighed up the near-term domestic concerns, while taking into consideration the likelihood the Fed lose its ‘patient’ stance on rates and thought they can hold off for a month or so. Rates cuts will materialise though, the RBA have simply bought themselves time.

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