RBA cuts rates but hawks help drive AUD higher

European markets are drifting lower in early trade, as markets start to show a degree of hesitancy for the outcome of today’s peace talks between the US and Russia. The absence of both Ukraine and Europe in those talks say a lot about the US’ perceived ability to simply strike a deal and impart that upon the parties most affected by that agreement. Zelensky has stated that he will not agree to a deal that does not involve the Ukrainians, while Europe are waking up to the notion of them having to support Ukraine in the absence of US involvement. A peace deal could provide the basis for lower commodity prices and lower military assistance to Ukraine. However, the benefits of a lower bill to fund Ukrainian war efforts soon fade once factoring in the clear requirement to build out the European military force and potential troops on the ground under any peace agreement. Nonetheless, peace in Europe does provide a bullish driver for the region and thus the success or failing of these talks will likely be reflected in equity valuations going forward.

The UK jobs report heightened fears of a stagflationary environment for the economy, with rising claimants coming alongside a higher-than-expected wage growth metric. With total wage growth rising from 5.5% to 6%, the underlying inflation pressures remain prevalent despite the somewhat underwhelming growth trajectory. Coming in advance of tomorrow’s UK inflation report, the expected rise across both headline and core CPI points towards a potential risk-off move that could dent FTSE 100 gains but benefit the pound.

The Reserve bank of Australia finally kick started their easing process, with the bank slashing rates by 25 basis points overnight. While this marked the first cut since November 2020, any expectations that this will represent the beginning of a dramatic shift in emphasis from the RBA should be tempered somewhat. The relatively hawkish tone highlighted the ongoing upside risks, with the bank pointing towards the strong labour market in a statement that was hawkish enough to help lift AUD despite the cut.