U.S. Equities At New All-Time Highs, Pound Declines Before U.K. CPI Data
James Woods | Aug 16, 2016 10:28
Monday was a quiet night for data releases in the U.S. with the only notable release being the NAHB housing market index (MoM Aug) reflecting home sales and expectations of future home building, which was in line with expectations with a reading of 60 up from 58 in July. All three key U.S. equity benchmarks rallied to new all-time highs shown on the first chart below, as the market lowers interest rate hike expectations following disappointing retail sales figures on Friday. The S&P 500 gained +0.28%, Nasdaq100 +0.42% & Dow Jones Industrial Average +0.32% while the U.S. dollar index fell -0.11%.
I’m sure the question many investors are asking themselves is how long can this go on? Overall from a longer-term perspective the break to new all-time highs is very encouraging although short-term momentum indicators suggest the price is highly overbought suggesting the increased risk of a pause or pullback in the short-term. In a world where central banks are easing monetary policy (Japan, United Kingdom, and Australia) while the Federal Reserve is seen holding rates steady at 0.5% investors are increasingly being pushed into riskier assets in the search for yield. This will continue to be supportive of risk assets including bonds, equities and commodities while any improved earnings in Q3 following their better than expected earnings in Q2 we have seen would help justify the next leg higher.
A weaker U.S. dollar helped boost commodity prices, both WTI & Brent crude oil gaining +2.74% & +2.24% on continued speculation around renewed output freeze talks in Algeria next month. Copper gained +0.51%, natural gas +0.23%, iron ore -0.28% and precious metals spot gold & silver both finished +0.24% & +0.52% higher respectively.
The Nikkei & Topix indices finished -0.3% & -0.5% weaker respectively as the Yen was relatively unchanged up just +0.02% following disappointing Japanese GDP figures on Monday. Forecasts were for a reading of 0.7% on an annualised basis for quarter two against an actual reading of 0.2% with the biggest drag on the figures coming from exports which subtracted -0.3% in the face of the strengthening Yen and business investment which declined -0.4% on an uncertain outlook for the economy.
The GBP/USD declined -0.29% as the FTSE100 & FTSE250 gained +0.36% & +0.4% respectively ahead of Tuesday’s CPI figures (MoM Jul) released at 6:30pm Sydney time. This data will be the first key data encompassing the period following the June 23rd referendum to leave the EU and will provide our first look at the impact on the economy. U.K. unemployment figures (MoM Jul) are also released on Wednesday at 6:30pm Sydney time. The second chart below highlights the British Pound which has now declined around 14% following the Brexit with the weaker currency boosting the FTSE100 9.5% over the same time given a large portion of FTSE100 companies earning significant revenue overseas.
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Locally the S&P/ASX 200 closed +0.16% higher while the market is set for a marginally stronger open this morning with ASX SPI200 futures up just 8 points in overnight trading. Locally we have the minutes from the Reserve Bank of Australia’s August meeting where it reduced interest rates by 25 basis points to a record low 1.5%. We already know the RBA expects inflation to remain well below its 2% target over the next few years and the minutes may potentially give us further insight into whether or not further cuts are on the way. The RBA is likely to adopt a wait and see approach to assess the impact of the rate cut over the next few months although they have signalled previously the belief that there are increasingly diminishing impacts as rates approach the 1% level.
Data releases:
- RBA Meeting Minutes (Aug) 11:30am AEST
- U.K. CPI (MoM & YoY Jul) 6:30pm AEST
- Euro-Zone & German Zew Economic Sentiment Survey (MoM Aug) 7:00pm AEST
- U.S. Housing Starts & Building Permits (MoM Jul) 10:30pm AEST
- U.S. Consumer Price Index (MoM Jul) 10:30pm AEST
- U.S. Real Average Weekly Earnings (YoY Jul) 10:30pm AEST
- U.S. Industrial & Manufacturing Production (MoM Jul) 11:15pm AEST
This article was written by James Woods - Global Investment Analyst, Rivkin Securities Pty Ltd. Enquiries can be made via james.woods@rivkin.com.au or by phoning +612 8302 3600.
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