Australia Eases Further

Daily Analysis - 05/05/2015

Reserve Bank of Australia Cuts Key Rate in Response to Inflation


With the deterioration in the outlook for raw commodities, the Australian mining sector has encountered many difficulties, hampering growth in the broader economy. The latest measures implemented to spur growth will help Australia meet robust inflation targets but at the expense of adding to an existing bubble in real estate prices.

RBA rate cut

In an unsurprising move overnight, the Reserve Bank of Australia moved to cut the benchmark interest rate by 25 basis points to 2.00%. According to the latest statement by RBA Governor Glenn Stevens, policy measures can be eased further, paving the way for future rate cuts despite assertions that inflation will hit the levels targeted by the central bank. He specifically cited the fall in capital expenditures spending as problematic to outlook as spare capacity coupled with weaker spending hurt growth in the near-term. The major risk to the economy at the moment besides any slowdown in inflation is containing the housing market which has seen prices to continue to rise as monetary accommodation spurs greater borrowing. The Australian dollar spiked higher on the announcement, contrary to the predisposition for rate cuts to see local currency rates fall due to accommodation.


IMF Ready to Abandon Greece

Officials from the International Monetary Fund have signaled that they may be unwilling to provide the next tranche of aid money to Greece even if compromise is made between Greece and creditors. The IMF is now demanding that European creditors take haircuts on their Greek debt exposure with Athens unable to meet the primary surplus target of 3.00% by the end of 2015. Instead of a surplus, Greece is running at a 1.50% deficit pace, meaning that without a write-down in existing debt obligations the nation will likely be forced to default on upcoming IMF repayment obligations. The IMF has theoretically threatened itself with non-payment if it throws a wrench into negotiations with repayment obligations of over EUR 1 billion in May and EUR 7 billion to the ECB in the coming months. The Euro continues to give up ground against peers as negotiations drag on.


Chinese Stocks Stumble

The prospect of increased regulation and government scrutiny sent the Shanghai Composite tumbling by -3.89% as brokerages rein in margin trading accounts. The Shanghai Composite has been one of the globe’s best performing stock indices, doubling in the last twelve months as local investors were herded into stocks with millions of new brokerage accounts opened weekly. Any increased regulation in the local markets is likely to see momentum abate, as evidenced by the massive profit-taking in Chinese stocks in the overnight session. However, this highlights the increasing risk for investors as momentum higher is driven by the advent of additional accounts while macroeconomic conditions in the nation continue to slide. Australia’s move to bolster the economy by cutting rates might translate to some improvement in Chinese fundamentals as import prices fall in conjunction with expectations that monetary policies will remain relatively loose.


Natural Gas Equidistant Channel Technical Pattern

Energy prices continue to recover as traders reverse on more bearish sentiment towards natural gas and oil. The end of the winter weather season might see demand for natural gas decline as heating fuel requirements abate however, the plunging drill rig count will continue to support further upside in prices. If production falls as a result of fewer drilling operations and demand stays constant, prices will likely continue to rise. Gas prices are currently trending to the upside in an equidistant channel formation which has a bullish bias. Optimal positions are taken at the lower channel line to be closed at the upper channel line. Fighting the prevailing trend is not suggested due to the worsening reward and expanded risk characteristics. Any further drop in the drill rig count will likely pressure prices further to the upside in the near-term.


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