Market Overview: By Sam Coxhead of www.directfx.co.nz
Last week proved to be a very interesting one for the financial markets, with a wide range of themes at play. The
European Central Bank (ECB) held center stage with their much anticipated monetary policy announcement. Whilst short on
details, the intent is clear. ECB head Mario Draghi has placed pressure back on European leaders to ratify changes to
the European Stability Mechanism(ESM).
These initiatives would enable then a bailout fund to work in tandem with the ECB to lower the cost of funding (bond
yields) for stressed Euro-zone members. If these initiatives can be achieved, there would be a clearly lower funding
cost for member states and more secure bond holdings for the European banks.
This leads further to financial stability and viability of the Euro-zone and single currency going forward. Elsewhere in
the market the Bank of England (BOE) left monetary policy unchanged as expected. Further policy easing should not be
discounted before the end of the year, maintaining pressure on the Pound Sterling in the short term. US employment
numbers were better than expected at 163,000 added jobs, and broke a three month streak of sub 100,00 jobs growth.
Markets in Australasia proved robust once again. With economic news holding up relatively well, and stable monetary
policy in both New Zealand and Australia, expect the offshore inflow of funds chasing the high cash rates to continue to
underpin demand in the short term at least.
Economic news in Australia was relatively strong last week. Building approvals, private sector credit and retail sales
numbers were all close to, or better than expectation. The retail sales number had the largest impact in driving demand
for the AUD. This week sees the Reserve Bank of Australia back in focus with what will be an unchanged monetary policy
decision on Tuesday. The statement will be closely watched and will tie in with their release of the quarterly Monetary
Policy Statement on Friday. Expect the RBA to remain relatively neutral, and ready to act should the situation in Europe
deteriorate further. Last week did see a material paring back in expectations for any further easing in the near term.
Also of crucial importance are the 2nd quarter employment numbers on Thursday, with the market expectation an uptick in
the unemployment rate to 5.3%.
There was little in the way of top tier economic news last week. The NBNZ Business Confidence survey revealed slight
increase in sentiment, in what was an otherwise unspectacular survey. The bounce back in the Fonterra diary auction
prices stirred interest in the NZ dollar market, as these results are obviously closely followed by international
investors. The interest rate market has pushed short term interest rates higher with the increase in wider market
sentiment driven by the ECB initiatives underway. Also adding to the positive sentiment was the S affirmation of New Zealand credit rating. This week sees the employment numbers for the 2nd quarter released on Tuesday
and these will be closely watched as usual, with the market expecting a small correction lower in the unemployment rate
Last week proved to be relatively positive one for the US economy. Consumer confidence and house price numbers increased
by more than the market expected, but the increase of most impact was seen in the employment growth numbers released on
Friday. The burst back through the 100,000 added jobs level to 163,000 was well received by markets and now any
expectation for further quantitative easing has been pushed back to the end of the year at earliest. The one blight on
the week was a disappointing manufacturing number. This survey will be closely followed next month to see if this fall
in activity becomes entrenched. This week is relatively light on economic data in the US, but two separate speeches by
FED chairman Bernanke will be closely followed
The ECB monetary policy meeting was the primary focus for the European market last week. ECB President Mario Draghi
started to put in place measures to back up his dramatic pledge of support from the previous week. Part of his
initiative is to draw in support for coordinated action with the ESM. Further details and concrete moves are likely to
be released at the next meeting on September 6th. Certainly the expectation of the effectiveness of efforts has started
with both Spanish and Italian bond yields moving materially lower in the last couple of sessions. This week is light on
economic data in Europe so any headlines from influential Euro-zone leaders will be closely followed. The ECB monthly
bulletin on Thursday could also be used to further provide insight on the upcoming initiatives, and therefore should be
Last week’s UK manufacturing data mirrored the horrid GDP result from the week before. The number was the weakest since
mid 2009 and further opens up the way for additional monetary stimulation from the BOE at some point later this year. As
expected last week’s BOE meeting saw no change after activity was increased at the previous announcement. This
Wednesday’s inflation report offers a prime opportunity for further communication from the BOE, and is the highlight for
the week. Expect any material recovery from the Pound Sterling to be some way off in the current environment, especially
against the Australasian dollars.
It was a quiet week for economic news in Japan last week. Second numbers of industrial production, household spending,
and cash earnings all came in below expectations. The YEN has dropped across the board as the wider market sentiment has
improved over the last week. This will be much appreciated by policy makers and the export sector. Expect no changes to
monetary policy at this week’s announcement from the Bank of Japan on Thursday.
The single piece of economic news last week in Canada was the close to expectation result for the monthly GDP. This week
should prove of more interest with building and manufacturing numbers starting proceedings on Tuesday. These are
followed by trade numbers Thursday, and the important employment numbers to round out the week on Friday.
Major Announcements last week:
• NBNZ Business Confidence 15.1 vs 12.6 previous
• Australian Building Approvals +2.5% vs -14.6% expected
• Canadian GDP +.1% vs +.2% expected
• UK Manufacturing 45.4 vs 48.6 expected
• US Manufacturing 49.8 vs 50.3 expected
• FED leaves monetary unchanged as expected
• BOE leaves monetary policy unchanged as expected
• ECB initiates action to stablise debt markets
• Australian Retail Sales 1.0% vs .6% expected
• US Employment growth 163k vs 101k expected