Stan Shamu for Chris Weston, Chief Market Strategist at IG Markets
Downside pressure has continued to hamper any progress in the risk space. Focus is swiftly shifting back to Europe with some sharp moves in the periphery, alarming investors. With Russia/Ukraine tensions flaring once again and peripheral bond yields exhibiting some worrying signs, risk aversion is accelerating, particularly in European equities. The MIB was the biggest culprit after an unexpected GDP contraction stoked fears of further weakness with the country already in a technical recession. Italy’s MIB is now down 14.6% from its June 9 peak in AUD terms. While the MIB looks like it will recover a touch at the open, the rest of the region is pointing lower and this could weigh on the MIB as well.
The disappointment wasn’t just in the periphery as German factory orders also fell short of estimates. Concerns about the extent of Russia’s retaliation will see investors worrying about the future of energy supplies should the situation escalate further. While all this was taking place, the single currency actually managed a slight bounce against the greenback.
Traders could be looking to sell euro on strength
EUR/USD is fast approaching the 1.3400 level heading into today’s ECB meeting. Before the ECB meeting we have industrial production reports for Germany and Spain likely to set the tone for the single currency. We also have France’s trade balance data for June. While the BoE meeting has been tipped to be a non-event, analysts are varied about the commentary we can expect from the ECB.
Structural weakness continues to hurt Europe and signs of improvement are still quite distant. The ECB has already said should recent measures not have the desired effect, then more action would be on its way, but we never quite had an indication on the timing side of things. Any inclination towards some sort of ultimatum for an improvement could result in a move for the euro and equities. Given the challenges the region is still facing, strength could be used as an opportunity to sell by traders out there. On the USD side of the equation, we only have unemployment claims as the main release.
Australia jobs numbers weigh on AUD
Equities around the region are mostly weaker, but we have seen a comeback for the ASX 200 with the jobs numbers setting the tone for an AUD slide and a bounce in equities. The local economy lost a net 300 jobs in July and the unemployment rate spiked to 6.4%, the highest since mid-2002. Both readings missed estimates by a mile with the only glimmer of hope being the fact full time jobs rose 14,500. Part-time jobs contracted quite sharply and presumably this has to do with contracts falling off at the end of the financial year. The participation rate also increased to 64.8%.
As far as rate implications are concerned, the swaps market went from pricing in three basis points of hikes over the next 12 months to five basis points of cuts. Analysts generally feel this dispels any rate hike talk and even the change in the calculation, which some have blamed for the sharp unemployment rise, isn’t enough to sugar coat the picture. However, for the number to really have an impact, we’d have to see a trend forming here and this makes the next jobs reading particularly important.
Tomorrow’s statement of monetary policy will be looked at closely as the market seeks more clues on what to expect from the RBA. What we do know though is that the RBA is quite content with a period of stability in rates. The result of today’s data was an AUD/USD drop below the 0.9300 level with the pair looking like it’ll retest the August 1 low at 0.9275 in the near term. A potential move to 0.9200 could be on the cards in the near term.
Materials lead the ASX 200
Needless to say, rate cut hopes would be positive for local equities at the moment as the ASX 200 struggles to stem the tide at the moment and posting a fifth consecutive negative session. The materials have been surprise performers today and that’s mainly been a result of some positioning on Rio Tinto ahead of its results which will be released post-market.
RIO has been on the mend for a while and this has seen its share price rally from around $57 in June to now be trading above $66. Needless to say, the market is expecting to see a strong performance with iron ore production driving earnings. The recent production report was well received and London investors will get the first opportunity to react to the results in UK trade. Gold miners have also been a standout today with the precious metal coming back to life on the back of geopolitical tension and some USD weakness.