The risk rally continued overnight with crude oil sharply higher, stocks rallying and the Australian dollar trading above 75 cents.
But the big news this morning is from across the Tasman with the RBNZ delivering a surprise cut to Kiwi interest rates and leaving the door open for more. That crunched the Kiwi back into the mid 66 cent region, -1.3%, and also dragged the Aussie off its peak. It’s just another example that many individual countries, and the global economy more broadly, still face significant economic headwinds.
But for the moment the risk rally continues. And that means the S&P is up 0.33% at 1985, the Dow is up 0.17% and stocks in Europe were around 0.3% to 0.5% depending on the individual index.
That sets up a positive day on the local market with the overnight SPI200 rally of 10 points suggesting a continuation of yesterday’s spectacularly unexpected rally.
Here’s the scoreboard (7.46am):
- Dow: 16,981, +18 (+0.1%%)
- S&P 500: 1,985, +7 (+0.33%)
- SPI200 Futures (March): 5,167, +10 (+0.2%)
- AUDUSD: 0.7487, +0.0048 (+0.67%)
The top stories:
1. The Australian dollar traded through 75 cents last night. Crude oil and stocks are up again overnight and that market positivity has continued to turbocharge the Australian dollar’s rally to a high of 0.7527 overnight. That’s a solid performance after retesting the low 74 cent range yesterday. The Aussie strength has been derailed this morning by the RBNZ’s rate cut – see below – but it is still relatively strong.
It’s not really that hard to see why the Aussie is doing so well at the moment. It’s been bid for months. Even the lows this year in the mid 68s were nowhere near as low as most pundits expected given where commodity prices fell to. That spoke to underlying demand and so, with the recovery in sentiment and commodity prices, the Aussie has found more support. Add in relatively higher rates than most of the developed world and stronger growth than almost anyone expected and Australia has a good story to tell.
The question is whether investors will continue to pile in as the Aussie grinds higher. 78 cents is a simple garden variety technical target. Can it get there?
2. Speaking of growth – Moody’s says it’s so strong Australia’s AAA rating is safe. Is it a coincidence that the Aussie rallied soon after credit rating agency Moody’s reaffirmed Australia’s AAA rating yesterday afternoon?
“The robust GDP growth performance is credit positive because it demonstrates Australia’s resilience to external shocks,” Moody’s said. That is pretty much all forex traders and global investors need to hear in a world of negative interest rates and worries about global growth.
Resilience! Often sought, hardly ever found in the current global economic climate.
3.The ASX is as strong as an ox – now, can it break resistance? Oil is not the friend of stocks. That’s because as crude recovers so does inflation and that means the Fed is back in play. But for now at least stocks are rallying and the ASX is tagging along for the ride.
Except it’s not exactly tagging along, is it? Yesterday’s strong rally in the banks helped propel the ASX to unexpected strength – at least by your humble correspondent – with the 200 index closing at 5,157. That was a gain of 49 points, 0.96%. It was a gain that took the market back to its one-year down trend resistance. The question for the day is can the local market kick on and kick up and through the big level at 5,195 or will it again prove a bridge too far?
4. Whoa! The RBNZ cut rates. The Reserve Bank of New Zealand stunned financial markets earlier today, cutting its overnight cash rate by 0.25% to 2.25%, David Scutt reports. The RBNZ cited challenges facing the dairy industry, the 4% appreciation of the NZ dollar in trade weighted terms and many risks to the global outlook.
The RBNZ has a clear easing bias, noting that “further policy easing may be required to ensure that future average inflation settles near the middle of the target range”.
5. It’s the 7th anniversary of the bull market but 619 rate cuts have achieved nothing. Analysts at Bank of America Merrill Lynch, led by Michael Hartnett, say that since 2009 central banks have given markets 619 interest rate cuts, more than $10 trillion of financial asset purchases, and $9 trillion of government debt yielding 0% or less. That was meant to buy time for the economy to heal.
But central banks are losing the ability to turn “water into wine”, as BAML puts it, and its getting harder and harder for them to convince investors to pump money in to the financial markets. Ben Moshinsky has more here. You have to read that post, it puts everything into context. Including item 6 below.
6. Can central bank experimental policies actually work? Tonight the ECB will announce its latest decision on monetary policy. At present, Mario Draghi and his colleagues at Europe’s central bank are dropping EUR60 billion per month into the market via quantitative easing and it has recently moved rates into negative territory. Draghi, the ECB president, has promised to do more.
But with rates already negative, can taking them further below zero actually achieve anything for the real economy – or even asset prices? That’s the question Donal O’Mahony, a global strategist at Davy Capital Markets, asks in a really good article he wrote for the FT overnight. Key here, Davy says, is the ECB, and others, might be about to overplay their hand and achieve the opposite of what they want:
Seven years after the collapse of Lehman Brothers, the world economy remains a fragile place, but it is growing, and confidence levels are slowly rebuilding among households and corporates. The unconventional policymaking of major central banks was a necessary and calibrated response to the various crises faced.
However, now the game has changed. The policymaking mandate is no longer about crisis-management per se, but rather confidence-management. It is here that the continued wielding of experimental policies risks adverse reactions to confidence levels across both economies and markets. Draghi did “whatever it takes”; the risk now is that he does too much.
The behavioural finance and economics guy in me says negative rates send all the wrong signals and are a central banking own-goal.
And the overnight data round-up (courtesy BNZ Markets)
NZ: Card retail spending (m/m, %), Feb: 0.7 (0.3 exp)
AU: Westpac cons. conf. index, Mar: 99.1 (101.3 prev)
UK: Industrial production (m/m, %), Jan: 0.3 (0.4 exp)
CA: Bank of Canada rate decision, Mar 9: 0.5 (0.5 exp)
UK: NIESR GDP estimate (q/q, %) Feb: 0.3 (0.4 prev)
Have a great day. You can catch me on Twitter.
And now from CMC Markets’ Ric Spooner is today’s Stock of the Day
Medibank Private (MPL: ASX)
Medibank shareholders had a good result last week when it managed to extract a larger than expected 5.64% premium increase from the government. On the negative side, Bupa had significantly better sales growth last year, relegating Medibank to Australia’s number 2 in terms of total premium revenue.
This week, the share price has taken a breather after its vertical rally last week. Consequently it’s formed a pennant pattern.
Chartists see pennants as a continuation pattern. If it breaks through the top of the pattern, a typical chart strategy is to anticipate an extension of the “flag pole” move leading into it. It needs to make a good clear break through the pattern resistance as opposed to just dribbling through the corner. That would require a strong session and a clear break today.
Ric Spooner, chief market analyst, CMC Markets
You can follow Ric on Twitter @ricspooner_CMC