An Interesting Day for Australian Stocks

It all took a turn for the worse on Friday, didn’t it? The Australian stock market finished down more than 1% on the day. Investors appeared to reinterpret the strong jobs data from the day before as a reason for the RBA to hold off on another interest rate cut.

The 6,000 point level on the ASX 200 might have to wait until Glenn Stevens delivers another dose of easy money. If the market does need another interest rate cut to breach 6,000, then we could be in for a longer than expected wait.

That’s because the RBA will be confused for a few months about ‘stronger than expected data’ flowing in from the big drop in market interest rates late in 2014. I pointed this out in Friday’s Markets and Money.

They’ll also be terrified by the crazed behaviour going on in Sydney’s property market. The weekend just gone saw near record auction clearance rates in the Emerald City.

Incidentally, there’s an apt side story about that. Sydney’s moniker as the ‘Emerald City’ comes from a 1987 David Williamson play of the same name. One of the characters in the play compares Sydney to the Emerald City of Oz, from Frank Baum’s classic book, The Wonderful Wizard of Oz.

According to the character, new Sydneysiders were travelling along an imaginary yellow brick road to the Emerald City, expecting to make a fortune. Instead, the city turns out to be a bit of a fizzer, like it was for Dorothy. More like a brick veneer road.

Anyway, where was I? Oh yeah, interest rates. Glenn Stevens probably won’t lower rates again at a time while ever Sydney property investors make feeding time with piranhas look like a cultured affair.

That means rates are probably on hold for the time being. Which means the party for 6,000 points on the ASX 200 is also off the agenda for now.

Today will be an interesting day for Aussie stocks. Futures markets point to a slide of 47 points this morning thanks to a nasty day on Wall Street and in Europe on Friday.

But following the close of the futures markets early Saturday morning our time, the People’s Bank of China (PBoC) announced a sizeable 100 basis point cut in the reserve requirement ratio. This means banks now have to set aside less capital against their loan book, which theoretically allows them to lend more.

The cut was the largest since the 2008 global crisis, which gives you an idea of the slowdown China is now experiencing. The decision came after data showed new house prices fell year on year for the seventh month in a row. Having said that, the pace of decline is now slowing.

A cut to the reserve requirement is a form of stimulus, but it is nothing to get excited about. The issue with China is that when economic growth slows, it results in capital outflows, which has a contractionary effect on financial market liquidity. A cut to the reserve requirement helps to offset this effect, so it’s arguable as to how much stimulus this measure will actually provide.

My guess is a bit, but not very much.

So it’s going to be interesting to see whether the Aussie market views this as good news or bad news. Good news because of the stimulus effect, or bad news because its an indication of just how quickly the Chinese economy is slowing.

I’m writing this before the market opens so at this stage, it’s uncertain. Whatever the short term effect though, it doesn’t really matter.

Greg Canavan+,
for Markets and Money

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Greg Canavan
Greg Canavan is a contributing Editor of Markets and Money and is the foremost authority for retail investors on value investing in Australia. He is a former head of Australasian Research for an Australian asset-management group and has been a regular guest on CNBC, Sky Business’s The Perrett Report and Lateline Business. Greg is also the editor of Crisis & Opportunity, an investment publication designed to help investors profit from companies and stocks that are undervalued on the market. To follow Greg's financial world view more closely you can subscribe to Markets and Money for free here. If you’re already a Markets and Money subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Markets and Money emails. For more on Greg go here.

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