The RBNZ shocked markets cutting interest rates by a rare 50bp

The day’s key takeaways:

1. Bearishness still the overall tone of the day; commodities speak the truth

2. The daily yuan fix: a reading of US/China hostility

3. RBNZ shocks the market

4. Odds of RBA rate cuts climb, pushes AUD to 10 year lows

5. Increased chance of rate cuts boosts ASX200

6. CBA misses the mark, showing the effects of Hayne-pain

 

The run down:

1. A solid lead from Wall Street equities helped bolster sentiment, but as of 3PM today, the ASX aside, equity market action in Asia is still a little bearish. The dust is settling, but the danger hasn’t disappeared. Arguably, equities are being driven by technical factors and market-psychology rather than firm fundamentals. The risks remain the same. The US and Chinese relations haven’t improved in the slightest in the last 24 hours, with tensions between the two super powers still high. Look at commodities markets for the true guide: oil is in a technical bear market, gold is hitting fresh highs, and copper is plumbing YTD lows.

2. The Yuan fix was closely watched again today. More than just an economic management tool, the currency is currently acting as a quasi-barometer for Chinese hostility towards the United States. The fix today came a little on the weak side as far as markets were concerned, rattling a few nerves. But the PBOC did keep the currency below the 7-handle – a pointed reminded to the market that it is it which will dictate the currency, and not the market. The relative certainty provided by that act has been welcomed by markets.

3. The RBNZ shocked markets this afternoon, cutting interest rates by a rare 50 basis points in the one go. This is a central bank clearly concerned about the global growth outlook. New Zealand data hasn’t been that bad lately, after all. Growth is in line with long term averages. Inflation is sluggish but hardly worrying. Unemployment hit a decade long low last month. The RBNZ has gone about and done what other global central banks have hinted they would do, too. That is: cutting interest rates based on forward looking indicators, and not just backward looking unemployment and inflation figures. In short: Global “headwinds” are coming, and the RBNZ are moving now with rates, as a pre-emptive strike on an economic slowdown.

4. Rates markets are apparently of the belief that the ultra-aggressive RBNZ opens the door for an extra-dovish RBA. Markets are pricing in right now a 66 per cent implied probability that the RBA will cut interest rates in September. An October cut is baked-in entirely, more or less. And 44 basis points of cuts are priced-in by year end. The Australian Dollar has hit a decade low on the back of this. At time of writing, today’s lowest mid-price has been 0.6677. We are clearly entering a new sub-era of central banking: whereby policymakers are explicitly deviating from their mandated duties, and setting policy with the forward outlook, and long-term economic management at front of mind.

5. The weaker Australian Dollar and drop-in long-term rates has provided a lift to the ASX200. The benchmark index waivered in early trade, as investors recalibrated following two days heavy volatility. But the power of lower risk-free rates, and an enhanced earnings outlook by virtue of some currency depreciation, has proven enough to put the buyer in control of the market today. The ASX200 is 0.70 per cent higher as of 3PM this afternoon. It must be said: the clouds certainly haven’t cleared in the market, yet. The week’s sell-off has seen short-term momentum turn to the downside.

6. Reporting season is heating up on the ASX, and the CBA headlined the show today. Overall, the numbers disappointed. The bank is exhibiting clear signs of Hayne-pain, with cash profits falling 4.7 per cent, mostly due to the massive compensation bill the bank racked up as a result of the Banking Royal Commission. The CBA did hold meet expectations regarding its dividend, which came-in at $2.32 -- but did disappoint slightly by not announcing the distribution of a special dividend, following the sale Colonial First State. Net interest margins held steady enough around 2.10 per cent, however the bank did state it expected margins to be squeezed by recent RBA cuts in the period ahead. CBA shares have sold-off today by 1.3 per cent on the back of the news.