ASX
An investor is reflected in a window as he looks at boards displaying stock prices and an advertisement for zero percent interest rate for purchasing a car at the Australian Securities Exchange in central Sydney, Australia, July 8, 2015. Reuters/David Gray

October on track for a four-year record

There are now two central banks joining the early Christmas present stimulus program. By the end of the week there could be three, with a fourth not moving on rates until mid-2016.

The European Central Bank (ECB) clearly started the risk-on excitement in the equity market with confirmation that the governing council is reading monetary policy for further stimulus. That will mean negative deposit rates are likely.

PBoC trumped this action on Friday night with an actual physical move to policy – cutting the one-year lending and deposit rate by 25 basis points (bps) and slashing the reserve requirement ratio (RRR) by 50 bps (coming into effect from 24 October). It also added furthers cuts to lending rates and the RRR for certain institutions (the co-ops).

The estimated cash released from these policy changes is RMB600 to RMB700 billion in liquidity (approximately US$93.75 to US$109.3 billion). Considering the CPI reads and the industrial production reads over the past quarter, this should be no surprise. In fact, the surprise is that it’s taken this long for the PBoC to pull the trigger.

What might be missed by the headline reads is that the PBoC has abolished the deposit rate ceiling – this is a big step forward in liberalising the interest rate market and shows China is very much committed to its goals of liberating the financial system.

What’s catching my attention

· Do the moves by the ECB and the PBoC see the Bank of Japan (BoJ) joining the party and adding to its already massively stimulated economy? I would suggest so.

· Do the Fed’s dot plots on Thursday morning show that the board is no longer raising rates in December? The data, USD and corporate earnings all suggest that this is a logical conclusion.

· The effect of all this stimulus for risk-on investment is telling. After having the worst quarter since 2011 in Q3, the US is on track for its best month since 2011 and its best start to Q4 since 2011 as well. Since the lowest point in the S&P, the market has rallied over 11%.

· US earnings season reversed the fortunes of the week before, with the percentage of companies beating estimates on the revenue line now back above 50% and the EPS line still above 70%.

· The ASX over the month of October has added 6.6%. However, from the 29 September collapse where ‘$44 billion was wiped off’, the ASX has added 8.8% or $129 billion back in market value.

· Risk-on is spread fairly evenly. In the last 26 days, the energy sector has added 12.6% and the materials sector 9.9%. However, the cyclical space is not the only place that has benefitted from the change sentiment, with financials up 6.8% and consumer staples 8.4%; the ‘worst’ major sector over the past 26 days is healthcare with a 2.7% gain.

The ASX is pointing higher by 41 points to 5392 – that would see the ASX back in the black for 2015, joining the S&P in the same scenario. If the BoJ and the Fed moves like the market expects, risk-on will only gather momentum into the close of October.

Asian markets opening call

Price at 8:00am AEDT

Change from the Offical market close

Percentage Change

Australia 200 cash (ASX 200)

5,392.20

41

0.76%

Japan 225 (Nikkei)

19,112.60

1233

6.89%

Hong Kong HS 50 cash (Hang Seng)

23,547.50

396

1.71%

China H-shares cash

10,970.30

228

2.12%

Singapore Blue Chip cash (MSCI Singapore)

346.75

2

0.66%

US and Europe Market Calls

Price at 8:00am AEDT

Change Since Australian Market Close

Percentage Change

WALL STREET (cash) (Dow)

17,626.50

450

2.55%

US 500 (cash) (S&P)

2,071.78

51

2.56%

UK FTSE (cash)

6,442.50

116

1.77%

German DAX (cash)

10,819.10

611

5.99%

Futures Markets

Price at 8:00am AEDT

Change Since Australian Market Close

Percentage Change

Dow Jones Futures (December)

17,544.00

455.50

2.67%

S&P Futures (December)

2,065.00

50.88

2.53%

ASX SPI Futures (December)

5,377.00

136.50

2.64%

NKY 225 Futures (December)

19,277.50

770.00

4.16%

Key inputs for the upcoming Australian trading session (Change are from 16:00 AEDT )

Price at 8:00am AEDT

Change Since Australian Market Close

Percentage Change

AUD/USD

$0.7207

0.0004

0.06%

USD/JPY

¥121.385

1.665

1.39%

Rio Tinto Plc (London)

£25.23

0.97

3.98%

BHP Billiton Plc (London)

£11.45

0.49

4.45%

BHP Billiton Ltd. ADR (US) (AUD)

$24.80

0.70

2.91%

Gold (spot)

$1,164.26

-2.14

-0.18%

Iron Ore (62%Fe Qingdao)

$51.62

-0.56

-1.07%

IG Iron Ore (CNH)

¥355.05

0.00

0.00%

EVAN LUCAS Market Strategist
IG Markets

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