httpvh://www.youtube.com/watch?v=IgIzZWrSiVg
Markets tank overnight despite the prospect of QE3 and the US eschewing from European debt woes.
• Odds on Fed intervention shorten as treasuries gain; Nonfarms will be key.
• Local data not supportive for short-term Aussie strength.
• Eurozone not at risk of further contagion despite Spanish yields rising.
The US sovereign debt default was taken off the cards this week with President Obama signing the debt limit bill into legislation, ten hours before the deadline. The outcome was not in line with the President’s perfect strategy yet the markets were expected to rally off the back of greater certainty in the US recovery. That wasn’t to be with the S&P500 tanking 2.54% as the market focussed on the long term growth prospects State-side, fixating on weak Personal Consumption data for June (-.2%). Speculation is growing that the Fed will engage in another round of extraordinary asset purchases to suppress the cost of debt, really the only driver for stock markets and risky assets currently. Due to the likelihood of QE3, treasury prices have increased as the market prices in an extended period of high unemployment in the US and the possibility of another recession. As significant fiscal stimulus is largely off the cards, the only saving grace will be Fed intervention, or if the guts of the US economy turn in the near term. On that front, we’ll be watching Non-farm Payrolls tonight with the market pricing in 91K jobs added for the month of July.
The market had a two-way bet on the outcome before this week’s RBA interest rate decision with arguments for a rate cut slightly louder amidst weaker consumer spending. With inflation increasing to 3.6%, the prospect for a rate cut was slim and the RBA cited “uncertainty in global financial markets” for why they didn’t raise rates. Adding further downward pressure on the Aussie, the data out locally largely fell within estimates, namely Private Sector Credit (-.1%), Performance of Manufacturing (43.4), New Home Sales (-8.7%) and Retail Sales (-0.1%) while the Trade Surplus contracted 25% to 2.05 billion. China’s manufacturing data was also mediocre with only a minor expansion in July (50.7), meaning the prospect for interest rate hikes and a stronger Aussie appear limited in the short term.
With markets still concerned about the risk of contagion in Europe, the Spanish bond auction this week was closely watched. The trigger point at which governments have required bailouts recently is 7% on ten year bonds and this week, the yield on the 1.1 billion euros raised for 2015 debt reached 4.9%. Although being an increase in the yield paid, this auction was positively received and resulted in the benchmark ten year yields decreasing to 6.26 per cent. The outcome provides greater breathing space for austerity measures to take shape and as a result the AUDEUR cross fell.
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