httpvh://www.youtube.com/watch?v=6LjTFrjhNE4
Aussie shrugs off financial market distress to post strong gains.
• US equities flattened as commodity markets rally.
• Oil supply constraints a positive for Gold but hamstrings Bernanke.
• Economic data a mixed bag as the RBA keeps rates on hold.
The crisis in the Middle East is putting upward pressure on commodity prices and this is softening equity markets. The S&P 500 has been putting on considerable weight since December (+11.99%) however oil prices north of $100/barrel is curbing appetite for stocks. The importance of the risk attached to the middle east was highlighted in Tuesday’s overnight trade when better than expected ISM Manufacturing data (61.4) was not enough to stop the S&P500 free-falling 1.57%. Despite the significant geopolitical risk, the AUD has shown resilience above 1.01.
The unrest in the Middle East and Africa has seen oil prices flourish amidst concerns of supply constraints spreading to larger players like Saudi Arabia and Iran. The resulting inflationary pressures have seen demand increased for Gold ($1431), a hedge used to lessen the negative impact inflation has on bond yields. Fed Chairman Ben Bernanke, the most active participant performing CPR on the US economy, is not assisted by the higher oil prices. He allayed fears of it derailing the economic recovery however, when he noted at a Senate committee this week that recent spikes in commodity prices would result in a “temporary and relatively modest increase in US consumer price inflation”.
Tuesday’s RBA rate decision to keep the cash rate on hold (4.75%) was widely anticipated and the accompanying statement was broadly lacklustre. The economic data is proving key with business sentiment in most sectors lukewarm in Jan/Feb. Company Operating Profits (-2.8%) was weak however HIA New Home Sales (2.5%), Retail Sales (0.4%), AiG Performance of MfG Index (51.1) and GDP (0.7%) were marked improvements on previous figures. After the rate decision, the RBA Governor noted that interest rates would remain close to where they are for the next 12 months as they are “mildly restrictive” and thus “remained appropriate”. The tone was surprisingly dovish given recent rhetoric, yet lacklustre employment and GDP data in the US should keep the Aussie-Greenback cross at parity and above for the short term.
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