Price action was fairly muted during the session as investors attempted to read between the lines of Bernanke’s cryptic testimony to congress. As expected, the Fed chairman steered well clear of giving the market a yes or no answer on the topic of more asset purchases. Investors, however, appear to be satisfied with the Fed kicking the can further down the road, likely until its September meeting, as there was no sustained rally in the US dollar, although there was some risk selling later in the session. But we can likely attribute this price action to consolidation trading amidst a lack of headline data releases.
However, there was some interesting news out of China today. Property prices in many of the country’s major cities rose for the first time in a year. Does this mean the stimulus injections by Beijing are working? Yes, but it also highlights a major problem faced by the Chinese government. A main reason why policy makers started to tighten policy in the first place was to cool down an exasperated property market, which was having a negative impact on parts of the Chinese economy. Hence, the government will likely not want to risk further inflating the property bubble, but at the same time it needs to stimulate growth. It’s a classic catch-22 situation - the government can act but risks stocking property prices again.
So, what will they do? In our opinion the best option is targeted government spending. In other words, the government should use a scalpel instead of a hammer. In particular, the government should aim any significant increase in spending at infrastructure, this way it can stimulate the economy in a more efficient manner than recent methods. Granted, there is still the risk this type of stimulus will inflate property prices, but we not are expecting the same level of incentives as a few years ago. Thus, the impact on property prices should be scaled back significantly.
Early in the session, the BoJ released the minutes from its June 14-15 meeting. But nothing of great value can be taken away from the minutes. Board members simply noted they are monitoring global conditions and may consider further easing, amongst a few other things. Also, Westpac’s Leading Index increased 0.8% m/m, modestly higher than the prior 0.5% increase. There was not a significant reaction from the yen or the aussie following the data releases out of their respective countries.
EURUSD struggled around 1.2300 throughout the session, as investors clearly remain cautious about pushing the pair too high amidst the uncertainty surrounding the outlook for Europe. The aussie managed to hold its ground above 1.0300 against the dollar for most of the session but found some resistance around 1.0330. It was a similar story for NZDUSD as the pair struggled to build on overnight gains.
Equity markets are mixed, with the ASX200 around 0.35% in negative territory and the Nikkei225 around the same amount in the green, at the time of writing.