RBA prepares for a soft winter in Australia

Equity bounce may be shortlived
By Brenda Kelly

A bounce in equity indices is unfolding this morning. With several of the euro group set to meet today, markets are clearly expecting a positive outcome on the Greek debacle Capital controls have been in effect for a week now and it will be difficult for the ECB to maintain current levels of ELA should the Greeks miss the payment due to the ECB on 20/7. The risk of Greece defaulting on this is high and will likely lead to ELA cut off which in turn will reduce the likelihood of Greece staying in the Eurozone. We are in the eye of the storm and in some respects the moves seen this morning are little more than short covering. The contagion effects, for now appear muted but the political ramifications for other Eurozone members and the precedent that may be set may well negate some of the buoyant business and consumer confidence as well as credit conditions in peripheral and core markets.

Information technology and healthcare are the leading sectors this morning, even financials are catching a bid. With the UK budget due out tomorrow we may see the pound present some additional weakness which may help to support the FTSE in the near term. The imbalances in the economy despite promises to the contrary are becoming ever more apparent. We’ve seen a mixed set of data which could well point to the prospect of lower growth in the UK and tends to deal a blow to the Conservatives.

Manufacturing output fell 0.6% month on month despite the consensus for a gain of 0.1%. Year on year, the output has only increased by a mere 1%. Industrial production fared better, gaining 2.1% year on year and a 0.4% gain on the month. Much of this could be attributed to the rebound in the oil and gas sector in June. Given that oil prices have fallen 11% since the end of June, this may be a temporary respite for industrials.

Equity Highlights:

Just weeks after reporting that the declines in oil and gas sector would weigh on its full year revenue and profit, Weir Group has agreed to buy Delta Industrial Valves for a value of $47m with an additional $10m to be paid over the next 18 months. The Delta deal will open up Weir's presence in mining and oil sands markets. With news of the Delta Industrial Valves buy, Weir's share price is now heading towards the lows last seen in early January. The 1600p mark has provided a good buying opportunity in the past but with oil prices back under pressure, it remains to be seen if the support will hold."

BP PLC: All the speculation of BP being a takeover target is likely overdone. Given its market cap, the fact that it’s outperformed its peers in the first 6 months of the year and its exposure to Russia leaves it an unlikely target when compared to other oil stocks. There will be consolidation in the sector but the focus will be elsewhere.

We are calling the Dow higher by 100 points.

RBA prepares for a soft winter in Australia
By Ipek Ozkardeskaya

The Reserve Bank of Australia kept its OCR unchanged at 2% as the AUD ‘declined noticeable against a rising US dollar over the past year, though less so against a basket of currencies […] further depreciation seems both likely and necessary particularly given the significant declines in key commodity prices’ Governor Stevens said.

A year ago, Stevens would have never believed that his will for the depreciation in the Australian dollar would have been this painless. After having topped at AU$ 74.50 million in March 2015, the RBA’s foreign reserves retreat to AU$ 67.3 billion in June. During the same period, the path to Stevens’ 75c target has been effortlessly built and 75c threshold is now being breached for an advance to 70c last seen in Q1, 2009.

Stevens is clearly winning the battle on the FX field, however Australia is still far from leading the war for strong economic recovery. The macroeconomic environment becomes ever more sanguine now that the market volatilities in highly leveraged Chinese markets are getting out of control, the commodity prices have hard time getting their strength back and the structural shift from the mining to construction sector in Australia is not an example of success.

Good news is that the loose monetary policy environment announces a soft winter in Australia.

AUDUSD consolidates weakness below 0.75c mark. The break below the 75c support opens the way to the next critical level of 70c as the dovish RBA stance should, in mid-term, should push the AUD lower alongside with the ongoing softening in commodity markets. Given that we approach oversold conditions (RSI at 30%) against the US dollar, the immediate downside potential is being exhausted. Decent option barriers at 0.7480/0.75 stand ready to face any corrective move on the topside however. Resistance is building at 0.75/0.7550 zone.