The days and weeks before the RBA Meeting in which rates were cut 0.25% were positive for our market, reflecting the expectation that rates would drop, spurring growth in asset prices
News In Review
As was widely expected by both economists and the market, the RBA cut its policy rate by 25 basis points to 1.50%, with the accompanying statement noting that “the Board judged that prospects for sustainable growth in the economy, with inflation returning to target over time, would be improved by easing monetary policy at this meeting”. The Bank noted that the risks associated with high and rising household sector leverage and rapid gains in housing prices have diminished.
Our major banks responded by holding back some of the rate cut to bolster their margins, passing on the following cuts:
National Bank 0.10%
Commonwealth Bank 0.13%
The Bank of England (BoE) also cut its policy rate from 0.5% to 0.25%. According to BoE Governor, the decision was motivated by an economic outlook that had “changed markedly”, with the Bank cutting its 2017 GDP growth forecast to 0.8% from 2.3% and its 2018 GDP growth forecast to 1.8% from 2.3%. The BoE also announced that it would purchase 60 billion pounds of UK government bonds over the next six months and 10 billion pounds of corporate bonds over an 18-month period.
Australian retail sales rose just 0.1% in June, a surprisingly low gain in a low rate environment. The RBA rate cuts in May and again this past week may support spending over the remainder of 2016.
In the US, there were 255,000 jobs added in July, a very healthy figure. The unemployment rate remained unchanged at 4.9%. The positive figure increased speculation the US Federal Reserve may raise rates at their upcoming meeting.
Two key gauges of Chinese factory output in July showed conflicting results, with the official Manufacturing Index (which focuses on larger state-owned companies) weakening and the Caixin Manufacturing Index (which focuses on smaller private companies) rising to its highest level February 2015.
Japan’s Cabinet approved a government stimulus package that includes 7.5 trillion yen ($73 billion) in new spending to complement the country’s negative interest rate policy designed to spur growth in the struggling economy. The new stimulus will mainly be directed towards infrastructure projects and welfare.
A stress test of European banks found that the payment of dividends during times of pressure posed a burden to the undercapitalised banks. The tests also found that almost two thirds of the banks held a common equity tier one ratio below 10%.
The days and weeks before the RBA Meeting in which rates were cut 0.25% were positive for our market, reflecting the expectation that rates would drop, spurring growth in asset prices. The market response to the rate cut in the days afterwards were the opposite. The common market phrase comes to mind “Buy the rumour, sell the fact”. This statement is commonly used to explain why market prices fall after a positive announcement, as positive news is generally priced in. Rate drops have been viewed as positive for markets recently however they reflect challenges in the Australian market so a negative share price response is logical.
The Australian dollar lifted immediately following the rate cut which is an unusual response and not what the Reserve Bank was hoping for. The rate cut had limited impact on the competitiveness of our currency which is being driven largely by movements in US dollar. Governor Glenn Stevens will be looking towards Janet Yellen of the US Federal Reserve for assistance in lowering the Australian dollar through higher US rates.
China: Consumer Price Index (YoY) (JUL), New Yuan Loans CNY (JUL)
Viva Energy REIT made a strong debut on the Australian share market, closing at $2.56 from its issue price of $2.20, representing a 16% share price rise. With an over-subscribed raising and reduced allocations, there was immediate demand for more exposure from existing investors.
Telstra announced it will soon be testing 5G with Ericsson’s radio test bed to examine the potential of the technology. The telco giant said it plans to run a demonstration in September that will look at 5G’s capabilities in a “real world environment”.
ANZ became the second major Australian bank after Westpac to lodge a formal defence against allegations of rate rigging, lodging court documents maintaining its trading was for a range of legitimate purposes.
Brambles will merge its energy container businesses with US-based Hoover Container Solutions in a venture that will be the second largest provider of container logistics to the oil-and-gas and chemicals industries.
Insurance provider Suncorp reported an 8% drop in annual profit driven by ongoing margin pressure. This negative news was partially offset by an uplift in profits from the banking and life insurance divisions.
Rio Tinto, the world's second-biggest mining company, reported a 47% drop in underlying profit at the end of the first half of 2016, with its underlying earnings falling from $US2.9 billion to $US1.56 billion, the lowest level since 2004. The company cut the dividend (as expected) from last year’s US$1.075 to US$0.45 this year.
Asciano has delisted from the Australian market after the $9 billion takeover received final approval. Shareholders will receive settlement funds on 18 August 2016.
Markets in Review
S&P ASX 200
SHANGHAI COMPOSITE INDEX
$1 Australian buys you:
ASX200 Sector Performance for the Week
ASX200 Biggest Movers for the Week
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