by Angus Nicholson for Chris Weston, IG
The Aussie dollar saw a strong 1.7% initial rally off the news that Turnbull was launching a leadership challenge yesterday, but has dropped 0.5%. The Reserve Bank of Australia (RBA) minutes today have really enlivened the prospects for further rate cuts. And despite any rallies from Turnbull’s victory or expectations for the Fed to keep rates on hold, the longer-term trend is for further weakness in the Aussie.
Malcolm Turnbull is widely respected in the business and finance community and his ascension to the leadership alone could see a boost to consumer and business confidence. Hopes had been high on the Abbott government’s election that productivity boosting reforms, tax reforms and important infrastructure spending to assist in the decline in mining investment would be forthcoming. The business community has largely been disappointed, and growth in the economy has slipped with little policy assistance coming from the government.
The key position yet to be decided will be that of Treasurer. The current Treasurer, Joe Hockey, is widely expected to depart from his position along with Abbott. The obvious choice would be Scott Morrison, whose move into the role of Treasurer would appease the right of the party who have largely lost out with Abbott’s fall. The only issue is Morrison, while refusing to stand as Deputy Prime Minister, still voted for Abbott in the leadership spill.
If Turnbull takes this vote against him as an affront, it is uncertain who would take the Treasurer’s position. One other possible choice would be Andrew Robb, who has performed exceptionally well in his role as Trade Minister, sealing three major FTAs and doing an admirable job of trying to sign one with India. However, India is well known in the international community for getting cold feet during trade deal negotiations.
One positive from Turnbull’s ascension as Prime Minister is stability in the polls. Based on previous opinion polls, Turnbull is expected to add 4-8% to the Liberal Party in the two-party preferred vote. This could put serious pressure on Bill Shorten’s position as leader of the Labor Party, with many in the business community stating they would be happy to see more power going towards Chris Bowen and Penny Wong.
The RBA minutes also showed just what close attention the board is paying to moves in China. Their concern was evident in lines such as:
“Members noted that it was not clear which assets the Chinese authorities had sold as part of the recent intervention, nor which assets were being bought by those taking capital out of China, but given the potential size of these flows, their effects on asset markets could be large.”
The board also noted that growth in major trading partners has slowed in Q2 due to weaker conditions in Japan and other East Asian economies, ie. China and Korea. And that several of China’s recent policy measures designed to support activity in China had not yet had their full effect. They stated that international economic developments had increased the downside risks to the outlook.
The RBA also mentioned that, due to cost cutting in the mining sector, they believe mining capex will drop to a lower level than they previously estimated. They noted that they expect unemployment to increase over the coming months.
Japan
The minutes definitely increase the likelihood of rate cuts over the coming months, with the RBA clearly seeing the external and domestic situation performing far worse than expected. Given this, any rallies in the Aussie dollar around the Fed leaving rates on hold at the meeting this week will only serve as opportunity to sell the Aussie. Predictions for the Aussie finishing the year around the $0.65 level seem far more probable given the RBA minutes.
The Bank of Japan (BOJ) also released their monetary statement today, leaving rates unchanged but doing nothing to dispel speculation that monetary easing may need to be stepped up at its October meeting. The BOJ statement shows that they forecast CPI to stay at 0% for the near term, and expectations are that their updated GDP and inflation forecasts will be lowered at the October meeting.
There is not a single data point in the BOJ statement which would point to activity rising to a level that would allow them to hit 2% inflation by mid-2016. Liberal Democratic Party (LDP) MP and advisor to Prime Minister Shinzo Abe, Kozo Yamamoto, said that the BOJ should increase its asset purchase program by 10 trillion yen at the 31 October meeting.
This speculation around a further increase to the BOJ’s Quantitative and Qualitative Easing (QQE) program is adding considerable weakness to the yen, which has weakened 0.9% since Monday 7 September. This speculation also seems to have boosted the Nikkei, which has risen 0.84% today, led by the consumer discretionary sector as would benefit greatly from a QQE-weakened yen.
ASX
The ASX did not experience a Malcolm Turnbull boost today, despite it seeming to affect the Aussie dollar overnight. The ASX futures market was largely driven by the moves in the S&P 500 futures market, and the market opened the morning down from these US market leads. However the index has continued to decline throughout trading today, falling below 5025 and touching last week’s lows.
The Banking sector has been one of the worst performers, declining 1.7%. The RBA’s negative outlook on the economy looks to be a precipitating factor for the decline in the index after the release of its minutes at 11.30 am AEST. And the negative outlook on the economy looks to have been one of the major factors for why the banks declined so much today.
Last Friday, Seven West Media (SWM) saw its shares inexplicably rise 9.6%, only to fall 6% on Monday. Today we find out that the 44% drop in SWM’s share price has been deemed oversold by management, and they have announced a $75 million share buy-back. The statement noted that “volatile trading” in SWM shares meant that “the on market buy-back at attractive levels will create value for the remaining shareholders. The Friday rally definitely seemed to be onto something as shares have jumped 8.6% on the news today.