Global Equity Markets Lower, IMF Revises Down Global Growth On Brexit, RBA Minutes Highlight Importance Of Data Before August, ASX SPI200 Futures Up 1 Point

U.S. equity markets pulled back on Tuesday despite a better than expected reading for U.S. housing starts, referring to the number of new residential construction projects that have begun in any particular month, jumping to 4.8% against estimates of a 0.2% gain. We have continued to see signs of a robust housing market in the U.S., this will continue to feed into consumer sentiment and help drive consumer spending.

The U.S. dollar reacted by gaining +0.51% while both the S&P500 & Nasdaq100 fell -0.14% & -0.36% respectively. Microsoft corp. reported earnings on Tuesday, earnings per share coming in at US$0.69 compared with estimates of US$0.58 as revenue also surpassed estimates of US$22.1b with actual of US$22.6b, in response shares gained up to 4.4% in afterhours trading. United Continental Holdings Inc. also reported with adjusted earnings of US$2.61 per share vs estimates of US$2.56 with revenue also topping estimates of US$9.39b with an actual of US$9.40n, the shares rose 1.4% after the close of the market.

The U.K. consumer price index month on month for June surpassed forecasts of 0.4% with a reading of 0.5% while a year on year basis gained 1.4% vs estimates of 1.3%. While this is a positive reading the majority of the data is from before the June 23rd Brexit referendum for which flow on effects will not be immediately clear. The British Pound fell -1.09% following the IMF revising its global growth forecasts for 2016 down from 3.2% in April to 3.1% citing the U.K.’s decision to leave the EU. The revised forecast notes that “this deterioration reflects the expected macroeconomic consequences of a sizable increase in uncertainty, including on the political front”.

Current IMF forecasts now suggest the U.K. GDP will grow at 1.7% in 2016 before falling to 1.3% in 2017 recognising that “the real effects of Brexit will play out gradually over time, adding elements of economic and political uncertainty that could be resolved only after many months”. Key European equity benchmarks fell, led lower by the DAX30 & Euro Stoxx 600 down -0.81% & -0.41% respectively as the Euro declined -0.49%.

On Tuesday we also had ZEW economic sentiment surveys out month on month for July with the Euro-Zone gauge falling to -14.7 from 20.2 in June while in Germany the index fell to -6.8 from 19.2 in June. The survey queries financial experts throughout Europe for a medium-term forecast about the economic situation and the negative reading reflects a decline in these expectations.

Commodities were generally mixed, the stronger U.S. dollar hurting oil prices as both WTI & Brent crude oil declined -1.30% & -0.55% respectively, iron ore fell -1.47%, while natural gas and copper gained +0.22% & +1.23%. Meanwhile precious metal spot gold gained +0.24% while spot silver finished -0.70% weaker.

The Reserve Bank of Australia released the minutes from its July 5th meeting where it left interest rates on hold at 1.75%. The notes reference that the domestic economy is transitioning away from the resource sector at a moderate pace over the past quarter with low interest rates supporting household spending while a weaker Australian dollar has helped the traded sector. Importantly “inflation was still expected to remain quite low for some time given very subdued growth in labour costs and very low cost pressures elsewhere in the world”.

The minutes also make reference to the upcoming August meeting, that by this meeting the board will have further information on inflationary pressure, labour market and housing activity with staff forecasts ahead of the August quarterly statement on monetary policy. This would then “allow the board to refine its assessment of the outlook for growth and inflation and to make any adjustment to the stance of policy that may be appropriate”. While there is no certainty the RBA will lower rates in August it does make sense that timing any rate cut with the quarterly statement on monetary policy would allow a more detailed explanation into the reasons behind this rather than the usual quick statement that accompanies the decisions.  CPI data is out on Wednesday the 27th of July and this will be critical to watch to give any indication of how the RBA may act, the probability of a cut priced by overnight index swaps around 58%.

In response the Australia dollar fell -0.98% which is highlighted on the chart below, the ASX200 also declined -0.13% and the market is once again set for a flat open this morning with ASX SPI200 futures up 1 point in overnight trading.

Data releases:

·         U.K. Average Weekly Earnings (3 Month & YoY May) 6:30pm AEST

·         U.K. Unemployment Rate (3 Month May) 6:30pm AEST

·         U.S. Crude Oil Inventories (Jul 15) 12:30am AEST

Chart 1 – Australian Dollar/US Dollar

Source: Rivkin, Bloomberg

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This article was written by James Woods - Global Investment Analyst, Rivkin Securities Pty Ltd. Enquiries can be made via or by phoning +612 8302 3600.

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