Markets move on a slew of dovish central bankers

Other central bankers throw their weight around

After the US Federal Reserve (Fed) exited the ring yesterday, some of the world’s other heavyweight central bankers weighed in on the global race to the bottom for global interest rates. The Bank of Japan (BOJ) met yesterday, and though they kept their policy entirely untouched, its governor Haruhiko Kuroda affirmed his commitment to monetary stimulus if necessary. Reserve Bank of Australia (RBA) governor Philip Lowe also delivered a speech, in which he was explicit in his belief that lower interest rates were necessary to absorb 'spare capacity in the labour market'. And the Bank of England (BoE) met last night, left interest rates on hold, but downgraded its forward outlook, prompting increased bets of a rate cut from the BOE this year.

Notable price action

Risk assets rallied, while sovereign bond yields fell, the USD tumbled, and gold spiked as a result of the dynamic. The S&P 500 touched all-time highs, and the ASX200 registered its own 11-year highs, as the prospect of easy money the world over whet investors risk appetite – though SPI futures this morning a suggesting that enthusiasm will cool on the ASX, with ASX 200 looking at a flat open. It wasn’t all smooth sailing it must be said. Nerves were rattled on news that Iran had shot down a US drone over the Straight of Hormuz, causing a spike in oil prices on fears of conflict in the region.

Rio saps some of the positivity from the market

The materials sector failed to capitalise fully on yesterday’s Fed-induced bullishness. The responsibility for this laid at the feet of Rio Tinto, after the heavily-weighted mining-giant announced a paring-back of its iron ore output forecasts, owing to 'mine operational challenges' being experienced by the company at a key mine in the Pilbara region. The news sent Rio shares down by over 4% at stages yesterday; and, perhaps ironically, gave a little lift to iron ore prices, which had been showing signs of potential weakness, following the announcement by miner Vale that it would be reopening one of its largest Brazilian mines.

Australian rates keep falling

The increasing prospect of looser global monetary conditions, as well the dovish commentary from our own central bank Governor, worked its way into Australian rates markets yesterday. Bets for rate cuts from the RBA lifted modestly, with the implied probability of rate cuts for next month jumping to around 70%, with 2-full cuts from the RBA before year-end priced in their entirety, right now. This sparked significant moves at the front end of the AGB yield curve: the rate-sensitive three-year note fell by another 4 basis points, to clock a fresh all-time low of 0.91%.

AUD pops courtesy of weaker USD

Despite this, the AUD tested life above the 0.6900-handle yesterday, as an even hastier fall in US Treasury yields enervated the USD. An ominous milestone: the yield on the benchmark US 10 Year note fell below 2% for the first time in more than two-and-a-half years, while the yield on the US 2 Year note dipped to around 1.73%. The fall in US yields at the front end of the curve narrowed the spread between US Treasuries and it Australian equivalent to around 78-basis points (briefly), and has underpinned the little rally witnessed in the Aussie Dollar in the last 24 hours.

Gold hits new highs

Arguably, the greatest beneficiary of this week’s concertedly dovish stance from global central bankers has been gold. The price of the yellow-metal hit a 5-and-a-half year high yesterday, as the USD tipped-over, and global interest rates fell. Importantly, too, from a technical basis, the gold price punctured resistance around $US1360, and came close to hitting the key psychological level of $US1400.00. Though the broader narrative is supportive for gold, the price action is looking somewhat exuberant now: the daily RSI is giving an overbought signal, and the price is divorcing itself from fixed-income markets slightly, suggesting that speculative flow has seized control of the price.

The latest readings on global growth

Attention will turn back to the global growth outlook today, ahead of tonight’s release of European Manufacturing PMI data. Markets are expecting another contractionary print in the key German and Europe-wide readings of the data, as the US-China trade-war, along with the continents ongoing structural issues, weigh on Europe’s economic activity. The Euro will be in focus around tonight’s data: markets are warming towards the prospect of rate-cuts from the ECB. A deteriorating outlook for the German and European economies could increase these bets, and sap the shared currency; while a better than expected print would likely fuel its recent pop higher.