Afternoon thoughts from the Trading Room – 3.30pm
We are seeing a continued extension of market illiquidity and quietness in Asia, with many of the major regions out for the Chinese New Year.
Equity markets in the region pushed higher early in the session, but have since pulled back as fears mount that Portugal will need a second bailout. Reports are suggesting that Portugal won't be able to return to markets for financing next year. The Nikkei is up 0.3%, whilst the ASX 200 is 0.1% higher. Markets enjoyed a positive start to the day on increasing hopes for a near-term easing of Europe's debt crisis. However, investors are growing increasingly nervous about an expected Greek debt solution. A conclusion to the negotiations was expected over the weekend, but nothing is yet to be announced. Risk assets continue to trade cautiously on the slight chance that the result out of Greece comes in contrary to expectations. Such an event could result in a swift retreat in risk assets after the recent strong run.
With caution seen across the Asian region, US and European markets are pointing towards modest losses at the open.
Germany seems ready to soften its long-standing resistance to increasing the firepower of the eurozone’s rescue funds. Reports suggest the fund might be increased to €750 billion in exchange for strict budget rules favoured by Berlin in a new fiscal compact for all members of the currency union. The IMF is sounding increasingly bearish after warning that the eurozone needed more money to build ’a larger firewall’ to prevent the crisis from spreading to its core economies. Running the EFSF and the ESM in parallel has been suggested in the past, and we suspect the hurdles that such a move would face might make this much harder than it seems.
Turning to local economic news, tomorrow’s 3Q CPI is expected to show that inflation pressures are subdued enough to keep the door open for a further rate cut. A CPI number of 0.2% is expected and anything higher than this could trigger a rally in AUD/USD.
Many analysts feel a 25 basis point rate cut is a done deal. Goldman Sachs has even added a further 25 basis point rate cut in March, taking the cash rate to a forecast low of 3.75%. Most analysts are now working on the assumption that the banks will not pass on the full rate cut combined with signs of flagging growth momentum, modest inflation and risks of further employment weakness in 1H12.
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