Markets to stay moody

Any relief rally in commodities and related financial assets on expectations of stabilisation in the complex did not really move according to script.

Oil Rig Site
Source: Bloomberg

The clearest is probably in the currencies, as equities and bonds were mostly lower in the overnight session.

The dollar index pulled back sharply as the euro and Yen gain substantially against the greenback, amid signs of increasing market volatility. While it’s tempting to point towards potential positioning ahead of next week’s all-important FOMC meeting, it’s still one week away.

Premature adjustment to prime for ‘buy on rumour, sell on the fact’ scenario might be somewhat risky. Moreover, the outlook for dollar remains unchanged. The higher US interest rate environment will arrive, probably accompanied by sustained signs of recovery in the US economy.

On the other hand, there is another view that may quickly gain traction in the coming sessions. One which would force a re-calibration of the consensus view that almost everyone has subscribed to so far. And the view came into much clearer view after the RBNZ meeting this morning. While the RBNZ cut its cash rate by 25 basis point to 2.5% as widely expected, the policy statement did suggest that the easing stance may be entering into a period of lull.

Don’t be mistaken. The RBNZ is still holding on to an easing bias, but just that further rate cuts are not in the pipeline because they see inflation picking up in the coming months. The two main factors supporting this outlook are 1) base effects are fading, i.e. low oil prices will have lesser impact on annual inflation rates, and 2) the pass-through effect of a weak kiwi translated into higher prices for tradable goods.

This raised the question of whether the other major central banks in the dovish camp are also having the same outlook on inflation. This could explained why they are not so aggressive on additional easing measures (e.g. ECB) or are perfectly happy in a pausing mode (e.g. RBA, BOJ).

The flood of easy money will still continue for a while longer, but more may not be forthcoming. That idea is perhaps what’s driving the euro and Yen strength yesterday, as recent weakness is now perceived as overdone in the latest revelation.

 

Markets

  • S&P 500 and Dow started Wednesday with a sharp bounce but the rally was short-lived as prices pulled back even sharper to end lower. The S&P quickly tested the 2040, a key support level for the past six weeks, but closed above it, ending -0.8% lower. Information technology, consumer discretionary and financials were among the worst performers.

 

  • The dollar index sank below 98 again to a one-month lows, dragged by rising euro and Yen. EUR/USD gained above key 1.10, although it might find it hard to make further inroads or even to hold on to the handle. Likewise, USD/JPY plunged over 1%, losing over one big figure towards 121.0 although the pair rebounded above 121.50 soon after.

 

  • Oil continued to flirt at recent six-year lows, but did not manage to push lower. The WTI futures tested below $37 but encountered strong bids at that level. Perhaps the EIA report which showed that US crude stockpile dropped the most since December 2012 provided some cushion. The renewed oil slump has further weighed on US oil producers. Chevron, the second-largest US oil producer, said it will cut investment on exploration, drilling and other projects by 24% to $26.6 billion, Bloomberg reported.

 

  • RBNZ cut official cash rate by 25 basis points to 2.5%, as it signalled that it could be done with the easing cycle. The central bank has cut rates four times this year, fully unwind 2014 tightening cycle.

 

  • China put up a two-year timetable for the two stock exchanges to adopt a registration-based system for IPOs. Currently, the CSRC is the regulator responsible for reviewing and approval each IPO application. Moving to the registration system will signal a shift to a market-based system as the question of IPO supply and timing will be in the hands of the companies and markets. This will support broader capital market reforms.

 

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