A record close in the Dow overnight, a near record in the S&P and the first break through 5,000 in the NASDAQ since March 2000, got the week off to a very positive start on Monday and has set the tone leading into the European session this morning.
The Asian session overnight has been a little more challenging but this has been largely due to domestic factors, including the Reserve Bank of Australia’s decision not to cut interest rates and comments from a Japanese official that halted the rally in USDJPY and pulled it back below 120.
The RBA had been widely expected to cut interest rates for a second consecutive meeting when they met overnight, which would have brought the main interest rate to a record low of 2%. A challenging economic environment has seen unemployment reach 6.4%, while inflation is very low as is business confidence, making a rate cut almost inevitable. Many thought it would come at this meeting but it would appear that the central bank didn’t want to cause any panic in the markets and instead chose to stand pat for now while leaving the door open to cuts at future meetings.
While traders were initially disappointed and the Australian dollar did rally, this is only likely to be a temporary stance from the RBA and not only is a rate cut very likely in the coming months, it’s unlikely to be the last this year.
The RBA decision wasn’t the only thing to halt yesterday’s dollar rally. An economic advisor to Japanese Prime Minister Shinzo Abe claimed overnight that USDJPY may be at the upper limit of its comfort zone, suggesting that further monetary loosening by the Bank of Japan may no longer have the governments support.
While Etsuro Honda is only an advisor and therefore his views may not have the support of Abe, it has become clear in recent years that the BoJ doesn’t really enjoy the kind of independence that other central banks do. With this in mind, Honda’s comments cannot be ignored. It will be interesting to see if Abe agrees with them going forwards.
Today is probably going to be one of the quieter trading sessions of the week, with not too much data being released. The UK construction PMI is expected to remain relatively unchanged this month at 59, while Spanish unemployment is expected to creep up slightly, but these are the only really notable releases.
The key event today will be Bank of England Governor Mark Carney’s speech before the Treasury Select Committee. Carney could provide further colour on the BoE’s plans for its first rate hike, with more and more people now looking at the end of this year as the most likely time. Low inflation is of course a concern but with Carney and the rest of the committee claiming that this is good deflation, it shouldn’t hold back the first hike. I don’t expect any change of Carney’s position today but that doesn’t mean we won’t get some volatility throughout as the committee piles the pressure on the Governor to give as much information as possible.
The FTSE is expected to open 11 points higher, the CAC 10 points higher and the DAX 17 points higher.