Global markets grounded as ‘cliff’ optimism fades; all eyes Greece
Despite moderate gains across European markets, an undercurrent of concern capped sentiment overnight with US equity losses encouraging selling across risk currencies. Markets are also reacting to news from the Middle East, with talk of a cease-fire providing superficial support. The kiwi led the decline against the greenback with the Aussie dollar close behind, as the previous ‘good news’ factor on fiscal cliff negations appeared to slow.
European finance ministers are currently locked in talks and widely expected to emerge with a 31.5 billion euro gift for Greece. In addition, prospects of additional funds appear to be on the table, with a possible 43 billion euro’s to be dispersed, made up of 31.5 billion euro’s due for the second quarter, 5 billion for September and 7.2 billion due at the end of December. Euro-group finance ministers and the IMF are also attempting to bridge the impasse on the time frame Athens has to reduce their budget deficit. Last week Lagarde raised concerns over the Euro-group decision to extend Greece’s budget targets by two-years, giving Athens until 2022 to reduce their debt to GDP ratio to 120 percent.
Earlier Tuesday, a well-attended auction of Spanish debt overnight kept Euro bids in play with near 5-billion euro’s sold, in excess of the 4.5 billion target. A sale of 12-month bills fetched 2.797 percent, compared with 2.823 percent in mid October. 18-month yields rose slightly from 3.022 to 3.034 percent. At the time of writing the Euro is buying $US1.2805.
The Euro held up reasonably well in anticipation of closure to Greece latest bailout instalment; however it’s clear there’s little impetus to carry the currency significantly higher, given the backdrop of uncertainty in the region. This uncertainty was elevated yesterday after ratings agency Moody’s downgrade French debt from AAA to Aa1. Still, markets appear to be taking the news in their stride, with only moderate losses recorded after the downgrade.
RBA keeps rate cut in frame
The releases of the RBA minutes yesterday prompted only moderate weakness, but quickly regained lost ground in the period to follow. On balance, the minutes appear slightly more positive on global conditions, acknowledging strong economic feedback in the United States, while noting a “lack of unsettling news” from the Euro region has been supportive for financial markets. As pointed out in the initial post decision statement, the minutes provided a gentle upgrade on China’s growth prospects, noting conditions appeared to have stabilized. Locally, the board acknowledged stronger housing data noting “tentative indications that housing activity may be reaching a turning point.” On inflation, its apparent growth in third quarter consumer prices was higher than the board forecast, noting the high Australian dollar may not be providing the same degree of inflation control as previously, while placing emphasis on the need for enhanced productivity and moderation in wage growth to contain domestic cost pressures.
To use a phrase straight out of the RBA handbook, its apparent December’s decision will be “finely balanced,” despite what could be interpreted as a ‘less dovish’ view of conditions both locally and abroad. The final paragraph, however, sums it up nicely stating: “Members considered that further easing may be appropriate in the period ahead.” For some, this is as clear as any signal a rate cut is imminent, especially in light of the fact December will be their last chance until February next year. Nevertheless, a balanced position would be to expect December’s decision to go down to the wire.
Perhaps a more timely indication of the RBA’s next move came from Governor Glenn Stevens overnight in an address to the Committee for Economic Development of Australia. While reiterating further “further easing might be required,” Stevens brought the time element into the equation, using the words “over time,” rather than expressing an imminent need to slash rates as soon as December. Stevens also noted talk of an end to the mining book was “over-hyped,” and simply evolving to the next phase. Clearly, one can look to far into minute changes in language; however, it’s apparent a December rate cut is not a foregone conclusion.
Local data on today’s docket includes the HIA House affordability index and DEWR internet skilled vacancies data. At the time of writing the Australian dollar is buying 103.7 US cents.