Taper Timetable drives market higher

Taper Timetable drives market higher

By Ric Spooner (Chief Market Analyst, CMC Markets)

The probability that US monetary stimulus will be stronger for longer plus upward momentum in the resource sector will lead to a confident open in markets this morning.

Weaker than expected jobs growth in the US has cemented the market’s view that the Fed will not start winding back its asset purchase programme until March next year at the earliest. The net effect of this may be to move the whole timetable for Fed tightening out by about 6 months compared to the expectations of only a couple of months ago. There is a risk that even this timetable will prove too optimistic. Last night’s NFP report confirms that momentum in the US jobs market was moderating even before the government shutdown. This means it may be some time before confidence levels build to drive the sort of jobs growth that will allow the Fed to feel comfortable in removing the stimulus.

Ongoing monetary stimulus is a positive for world equity valuations. For Australian investors it means not only a strong lead from US markets but also a greater chance of further rate cuts by the RBA, as they respond to the possibility that the Aussie Dollar will remain high.

As they search for relative value, investors appear to be reassessing Australian resource stocks. The recent round of production reports is starting to provide investors with comfort that the new management teams can walk the walk, as well as talk the talk, in terms of meeting production targets while at the same time bearing down on costs and capital expenditure commitments.

The release of Australia’s inflation figures at 11.30am will be closely watched. The most significant risk in these figures may be to the upside for the stock market and to the downside for the Aussie Dollar. With underlying inflation figures already in the bottom part of the RBA’s 2-3% target range, it is unlikely that a figure printing somewhat above expectations would prevent the Bank from cutting rates further if needed. A lower than expected inflation print on the other hand might fuel market expectations that the RBA will cut again given the high Aussie Dollar and sub trend economic growth.

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