US Labor Day makes for quiet night; Brexit captures headlines; markets prepare for RBA

US holiday makes for quiet start to week

With US markets out of action for their Labor Day holiday, it was always going to be a relatively quiet start to the week. It probably amounts to little more than the calm before the storm, given how loaded the economic calendar is in the coming days. There was news to note, however, even if price action proved relatively contained off the back of it: sentiment soured a touch on headlines that the US and China are having difficulty knuckling down the particulars for a meeting this month. Probably by virtue of that news alone, yesterday might be judged as a fairly bearish day for global markets.

Another Brexit delay? Or another UK election?

The most eye-catching and dramatic stories revolved around Brexit last night. The political climate in the UK is getting especially hot, as the Brexit deadline comes into view. Confidence in the UK economy was shaken last night, after it was revealed that in response to moves by anti-Brexiteers to delay Brexit by another 3 months, UK Prime Minister Boris Johnson was preparing a bill to potentially bring-about a general election on October 14, if this move to delay Brexit (again) proves successful. The political instability and uncertainty rocked the Pound overnight, pushing the Cable back into the 1.20 handle and towards new multi-year lows.

The overnight price action

In other overnight moves, with US stock markets away, action in equity indices was very subdued. The FTSE100 climbed 1% because of the fall in the GBP, but otherwise stock market price action in Europe was quite contained. Fears about global growth were evident, with oil prices down and copper prices eyeing off new two-year lows. The USD flexed its muscles, driven higher by the endemic economic and political instability in Europe – touching two years, according to the Dollar Index. The AUD plumbed the 0.6700 level as a result. While SPI Futures are suggesting a 15 point drop at the open for the ASX 200 today.

RBA headlines calendar, tipped to keep rates on hold

The RBA meets today, and if market-pricing is any guide, ought to keep interest rates on hold at 1.00%. As-a-result, today’s RBA meeting will one of those focused primarily on the commentary and guidance delivered by the central bank. Really, it’s going to be all about getting a gauge on the current risks to the economic outlook. Afterall, the global “uncertainties” alluded to by the RBA during its last meeting have only gotten worse. And on top of that, quarterly GDP figures are released tomorrow, and are expected to show the weakest annualized rate of growth for the local economy, at 1.4%, for over 8 years.

Will the RBA do whatever it takes?

Given these risks, market participants will be watching for (and welcoming) queues from the RBA that it is poised to cut interest rates again in October – and probably once more again after that before the end of 2019. Right now, a cut next month is priced-in as a roughly 70% chance; and a cash rate at 0.50% by year end is considered a fifty-fifty proposition. There’s the sense, too, that RBA Governor Philip Lowe is being pushed towards his own “Draghi-moment”. That is: giving that “whatever it takes” pledge to combat a potentially worse-than-expected slowdown in the Australian economy.

Markets looking for reassurance

Not that a dire turn is expected for the Australian economy, yet. Most economists are still estimating that the Australian economy will strengthen in the year ahead, albeit at a below trend rate. But with all this talk of QE, 0% rates and other unconventional monetary policy measures, there’s clearly some sort of desire in the market for assurances that the RBA will do all that it can to save the Australian economy from its first recession in three decades. Of course, the question is, as it has proven repeatedly this year: will the RBA unleash the doves?

A (possible) complicating factor for the RBA

There’s a potential complicating factor for the RBA emerging, too. The weekend’s national auction data was quite hot, raising the potential of another break-out in local property prices, especially in the big eastern cities. Such a situation would severely crimp the RBA’s ability cut interest rates further to support the local economy, without potentially bringing about major risks to the nation’s financial stability. One week’s data does not make a trend, of course. But another credit fuelled property bubble is a risk that the RBA – especially Governor Lowe, given his background in the subject – will be keeping a close watch on.