Stan Shamu for Chris Weston, Chief Market Strategist at IG Markets
Rate cut calls as Australia capex data disappoints
Consolidation remains the key theme in global markets with investors just struggling to find any fresh catalysts to drive equities higher. Locally, the focus has been in the latest capital expenditure numbers, which have seen the swaps market flare up a bit. Earlier this month, the swaps market was pointing to a 70% chance of a March rate cut but this had since dropped to around 30%.
Following today’s data, this number has since popped back up to around 53%. At the same time, the majority of economists expect the RBA to back up the February rate cut with another one in March, taking the official rate down to 2%.
The headline print showed a 2.2% decline in private capital expenditure quarter-on-quarter when the market was expecting it down 1.7%. Perhaps the most significant thing from the reading was the first estimate for intended 2015/2016 capital expenditure. This reading came in at $109.8 billion which was below expectations of around $119 billion.
Declines for both mining and non-mining investment means the economy is not quite responding to the last rate cut cycle in the way they would have wanted it to. The RBA would have wanted non-mining investment to respond to rate cuts but the fact it has not and, given that’s the direction the central bank has been wanting to head, then more is likely to be needed to support the economy.
Whether this rate cut will come to fruition next week though remains to be seen. After having squeezed higher in the past couple of sessions, AUD/USD retreated on the back of the release.
(AUD downtrend remains intact)
China and Japan rally
The ASX 200 has been sluggish today and retested 5900 after stuttering near 6000. Earnings have played a big role as well today, with some significant moves in the likes of Qantas, Nine Entertainment, Transfield, Acrux and Alumina.
Elsewhere in the region, China seems to have shaken off some of yesterday’s weakness very quickly as some encouraging headlines crossed the tape. There are reports suggesting China is preparing policies to aid property prices if the current weakness persists and that a selected five banks have been allowed to cut reserve required ratios.
The PBoC seems to be looking at various ways to aid the economy and speculation of some sort of action seems to be driving Chinese equities higher today. In the background, Japan has managed to extend its gains and trade at fresh cycle highs with speculation that a number of Japan’s pension funds are looking to reallocate more funds to Japanese equities.
Mixed open for Europe
Ahead of the European open, we are calling the major bourses relatively flat as there is limited data on the calendar. While Greece headlines have quietened down a bit, the situation will remain active in the background. No doubt the fact deeper negotiations are on the way will see Greece being front and centre again in the not-too-distant future. I wouldn’t be surprised to see investors look to buy the dips in European equities given the QE program is likely to keep equities underpinned, particularly the DAX.
On the economic calendar, we have unemployment change and consumer climate data out of Germany while for the region we have money supply and private loans data. In the UK we have GDP and business investment data. Given the recent run in the sterling, UK data is very interesting at the moment.
US trade brings inflation numbers and, given this was a big talking point in Janet Yellen’s testimony, it should be watched closely.