02/08/2016: Weekly video market wrap

02/08/2016: Weekly video market wrap

Scott Schuberg:

Good morning, viewers and welcome to our weekly wrap. I'm Scott Schuberg joined by James Woods. Hey James, how are you going?

 

James Woods:

I'm good, Scott. How are you?

 

Scott Schuberg:

Good. Thanks, mate. Just a few questions about things that happened last week and things that are going to happen this week. The biggest ticket item for today is the RBA meeting, which will be announcing an interest rate decision at 2:30 this afternoon. What should we expect?

 

James Woods:

Yeah, certainly I think the market is really pricing in that the RBA will act. Currently, I think the implied probability's around sixty-seven percent. We did have CPI figures out last week, which were very closely watched by the market. We saw the headline figure come in slightly under expectations. We looked at the RBA trimmed mean, was slightly above expectations. We saw a bit of a fluctuation in the Aussie dollar, but I think market still finds that there will be scope for the RBA to cut at this meeting, so the more likely scenario is the cut.

 

Scott Schuberg:

Okay, so if it's more likely, what if they don't cut? What if they leave rates? What do you think the Aussie dollar and the ASX will do?

 

James Woods:

Well, I think we'd see a drop in equities definitely.

 

Scott Schuberg:

Much of a drop? Sixty-seven percent's not huge. I don't think the market thinks that it needs it for better corporate performance. I think maybe we could get away with it if they don't cut?

 

James Woods:

Yeah, I think we can certainly get away with it.

 

Scott Schuberg:

Equity's on a good run, right?

 

James Woods:

Equity is on a fantastic run, this recent rally certainly does look like it has some serious legs to it.

 

Scott Schuberg:

Yeah.

 

James Woods:

It looks very sustainable. I think if the market were to react negatively, it would be very short-term and I think equities would find a floor quite quickly. In regards to the Aussie Dollar we can see it appreciate back towards eighty cents if they don't cut.

 

Scott Schuberg:

Okay. I want to talk about a little bit of a post-mortem on what happened with the Bank of Japan last week. There's a big event, certainly touted to be a big event. We did have a light position going into that on Dollar Yen. Can you talk me through what played out at the end of last week?

 

James Woods:

Yes, certainly. As widely expected, we did see the Bank of Japan act and loosen monetary policy further. However, the stimulus they've added certainly was underwhelming to the market and that's something we try to emphasis going into that. It seems like a real clear case of that adage, "Buy the rumour, sell the fact." The market got ahead of itself here and priced in too much, so we did see the Yen strengthen significantly on Friday by around 3.1 percent.

 

Scott Schuberg:

Yeah.

 

James Woods:

We did see Nikkei and TOPIX futures fluctuate wildly through the session before closing higher. I think the market definitely got ahead of itself. The Bank of Japan was pushed in to a corner, if you will. I think, overall, it was more important that they were seen to act, even if it isn't going to be that effective.

 

Scott Schuberg:

Okay. Talking about currency moves ... UK is an interesting one because there's almost complete expectations. A ninety-six percent chance of a cut there this week from the Bank of England, but there's a big delay between the Bank of England acting on monetary policy and when all these Brexit procedures will actually be implemented. Could shares in the UK get a bit of a short-term bump from this short-term easing of monetary policy?

 

James Woods:

Absolutely. I think they would get a short-term bump, how far to the upside, that is, may be limited. I think it's currently priced in at around ninety-six percent. This is a little bit different, in this case, I don't think the market's quite getting ahead of itself, as we saw with the Bank of Japan.

 

Scott Schuberg:

Yeah.

 

James Woods:

At the July meeting of the MPC we did see them basically come out in their statement and that suggest that the majority of voting members thought it would be appropriate to ease further at August meeting. Also, very likely. I think it's a very different scenario, but absolutely I think we'll see some benefit to equities. Particularly, I think the FTSE 100, rather than the FTSE 200, just given that it does have a higher portion of overseas revenue. With the weaker pound, they're certainly going to benefit from that.

 

Scott Schuberg:

Okay. With The Sterling then, could it be a case of "Buy the rumour, sell the fact," because if this is ninety-six percent priced in, Sterling's taking a beating already. Once this is out on the market, could we see a little bit of short-term strength in The Sterling?

 

James Woods:

Absolutely. Again, if they don't act or if it seen in any way underwhelming, we can see some appreciation in The Sterling. However, I would usually warn against that ... Sort of "Buy the rumour, sell the fact." With this following the comments from their last meeting, I think this is a little bit more of a unique situation. They do want to get ahead of any potential downside to Brexit so think this one will be a cut.

 

Scott Schuberg:

Okay. All right, lastly we'll talk about the US, obviously our market takes a big lead from the US. They've had a poor GDP figure come in last week. 1.2 percent second quarter growth versus 2.5 expected. That seems like a big miss, but it didn't take much of a gauge out of equity markets there and things keep sailing along. Can you explain that to me?

 

James Woods:

Yeah, sure, certainly. Look, it was a disappointing GDP print and we saw the most negative reaction in the US Dollar. The US Dollar index fell around one percent on Friday, following that release. Equities didn't take such a beating and that's because it's really just pushing back those Federal Reserve high expectations. I think we're looking around September 2017, at the moment, and pushing those expectations back is just going to continue to keep that floor on the equities and continue to support it. It's an interesting time for equities.

 

Scott Schuberg:

Yeah.

 

James Woods:

When we do see some good news coming out of the market, equities are reacting positively. If we see some bad news as well, equities are rallying as well. That's because any bad news ... They're going to push back rate hikes. Any good news ... It's doing well, but it's not enough yet to justify a hike. We're really in a bit of a "Goldilocks period."

 

Scott Schuberg:

Yeah, still a lot of confidence. I noticed we are re-balancing our Rivkin Global Momentum Portfolio at the moment. We're locking in some profits, which is great, and that's just taking advantage of these equity markets keep on shifting higher.

 

James Woods:

Absolutely.

 

Scott Schuberg:

All right. Thanks very much for joining us, James, we'll speak to you next week.

 

James Woods:

All right. Thanks, Scott.

This video contains general advice only

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