Well, well, well…
The RBA is out prepping the market for a rate cut just a few days after saying the economy was travelling along nicely. I wrote that this was likely in yesterday’s essay…and the week before.
From Adam Creighton, at The Australian:
‘The Reserve Bank has paved the way for further cuts to the official interest rate and could even resort to quantitative easing — “printing money” to buy government bonds — to ward off a potential downturn.
‘In a major speech last night, RBA deputy governor Guy Debelle declared the central bank was prepared to “go fast, go hard and not die wondering” by stimulating the economy — a nod to the Rudd government’s $52 billion cash injection to insulate against the global financial crisis.
‘Noting the Reserve Bank had “repeatedly” said the next move in interest rates was more likely up than down, Dr Debelle said there was “still scope for further reductions in the policy rate”.
‘“It is the level of interest rates that matters and they can still move lower,” he added, in remarks that could foreshadow a sharp reappraisal of the outlook by the Reserve Bank board when it next meets in February, after the summer break.’
The overnight share market action won’t do anything to dispel the worries about a sharply slowing global economy mixed with increasing political risk.
The Dow fell 0.32% while the S&P 500 index declined 0.15%. US stocks started the day deeply in the red and spent the rest of the session recovering. European stocks were absolutely hammered, with Germany’s DAX crashing 3.5%.
That means more selling for the Aussie market today. However, it will be interesting to see whether local stocks get any support from the hope of lower interest rates.
When there is a sea of red across markets, everyone has an opinion. And it’s usually tinged by fear and panic. Like euphoria on the upside, panic on the downside is contagious.
But let’s dispense with opinions for the moment and look at the facts. I do this by viewing charts. They show you the collective opinion of those making bets with their hard-earned money.
They reflect the fundamental data AND the psychological condition of investors. Charts are a much better informant than the individual pundit, with more than likely no money on the line…
And let’s face it, no one knows what’s really going on in this hugely complex world. In my view, ignorance is the best policy if you really want to understand what’s going on in the market.
Put your ego to one side and accept that you know nothing, and you might have a small chance of learning something.
So with that in mind, let’s take a look at a few charts to see where we stand right now…
I’ll start with the S&P 500. To make important levels clearer, the charts show prices on a closing basis, and therefore exclude intraday volatility.
Here’s the S&P 500. It’s in a spot of bother, but is still holding up above the October and November lows, as well as the lows from earlier in the year. That’s a positive.
Below is a chart of the NASDAQ. It paints a similar picture. Still holding above prior lows. One thing to note with both charts though is that the moving averages (the blue and yellow lines) are now trending lower. And they are putting a cap on the markets’ attempts to rally.
I’ve said before that if we’re going into a bear market, the NASDAQ will lead us into it. Right now it’s keeping its head above water. But with the trend now down, the odds suggest that the NASDAQ will at least head back and test the lows made in February and April.
Turning to the Aussie market now, and it’s still hanging in there. Support lies in the 5,650–5,660 region. Will the expectation of a monetary injection from the RBA be enough to rescue financial stocks today and hold up the market?
Maybe. I don’t know. All I can say is that the trend is down, and the odds favour a continuation of that trend. With global economic growth slowing, and our largest trade partner slugging it out with the US, there’s not a lot to like about Australia right now.
Here’s where my opinion comes into it, so take this with a grain of salt.
Australia’s economy is about as solid as a two-legged stool. One leg is the housing market, the other is our commodity exports.
We all know the housing market is in a spot of bother. Prices are falling, and there hasn’t even been an interest rate hike. House price falls are now flowing through to weaker household consumption.
To be fair, household consumption on an annualised basis has been on the weak side for a few years now. But it’s likely to get weaker again when the December quarter numbers come out. That’s because the robust 1.1% quarterly growth number from 17 December will drop out of the calculation.
Weak household consumption is fine when the mining sector is booming. But mining is now at risk from the US/China trade war. Ironically, the one area that is booming is coal exports, largely thanks to China installing massive new coal-fired power station capacity.
But if household consumption (the largest driver of economic activity) continues to slow when income from exports slows too, then the two-legged stool could topple over.