Global Markets Overview – 12/4/13

Talk really is cheap - RBA

With most still talking about the vanilla RBA statement yesterday, I feel the 'hard talk' strategy that the RBA is currently using to weaken the AUD is breaking down.

There is growing evidence that the RBA is being pushed towards intervention (either through further rate cuts or an unconventional method), as its 'hard talk' is running out of puff faster than expected.

Only three words were added to the December statement compared to November's; the key lines remained:

1. AUD is 'still uncomfortably high.'

2. 'Lower level of the exchange rate is likely to be needed to achieve balanced growth in the economy.'

3. 'The pace of borrowing has remained relatively subdued overall', which implies the RBA is aware of the housing pick-up, but is not worried about a bubble (yet).

However, unlike the Melbourne Cup statement which saw a tick up in the currency due to the interpretation that another rate cut in 2013 was highly unlikely (and this assumption was right), the jump in AUD/USD this time around is that idle threats are just that idle, and overriding macro data will push AUD/USD higher.

In a week where US data looks to be on the up after having seen the release of the economic optimism survey which rose steadily month-on-month; vehicle sales hitting 16.4 million in November compared to estimates of 15.8 million, plus last month's print of 15.2 million, on paper this should be seen as negative for the pair.

However, the fact US data is positive again put the ever-present December Fed meeting in clear focus. With the mass employment data drop at the end of the week (the most-watched economic piece of data for the Fed), expectations are growing that estimates will be beaten, and this will be the biggest trigger to front run, which appears to already be underway.

I feel we are about to go through July to September trading all over again; bond markets fell on expectations of taper at the September meetings. Risk currencies, particularly emerging markets (such as Indonesia and India) felt the pinch of a contracting USD pool, and we are likely to see similar issue this time around.

There is still three days to go, however if current trends in US data continues it's likely that the trading trends we saw in the middle of year will repeat, and this time it is more likely that the market will get the trade right.

Ahead of the Australian open

Today see the release of Australia's third quarter GDP; the estimate range is rather wide between 0.5% and 1.2%, seeing the consensus estimate coming in at 0.7% quarter-on-quarter for a year-on-year estimate of 2.4%.

The GDP print should confirm the line from the RBA that growth is below trend. However I would not be surprised to see a slight beat on the consensus number after, following the firmer current account release yesterday coupled with the fact Q3 saw record exports from Port Headland and other parts of the mining community. All in all a slight positive read will have the AUD rising further.

Ahead of the open the ASX 200 looks like it will continue to follow the global weakness on the bet that the Fed will taper. Currently the market looks like opening 42 points lower to 5214 (-0.8%), having seen the CAC and DAX lose 3% and 2% respectively while the US slid another 0.5%.

The year-to-date high looks a long way off, and on current trends it may be a while until the local market punches through 5400 points. BHP's ADR is suggesting further weakness despite the fact iron ore jumped up 1.2% to US$138.20 a tonne.

The disconnect here looks to be more to do with technicals and also based on sector selling rather than anything else. A similar conclusion can be drawn with natural gas and gas plays, which have contracted despite the fact natural gas has jumped to yearly highs.

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