Weak US retail sales hit rate rise expectations, global equities lower despite small rise in oil, ASX futures down 21

Reminder: Last day at The Legian hotel in Bali today, off to The Chedi Club in Ubud this morning, and all readers should be reminded that they have just two weeks left to open a new Rivkin advice, stockbroking, global dealing, foreign exchange or wholesale managed account, or a self-managed superannuation fund, to be in the draw to win Rivkin's $8,000 luxury trip giveaway - see https://www.rivkin.com.au/bali for all the details.

Aha! Finally investors are beginning to concede that the market has been pricing in a US interest rate rise based on the unemployment rate alone, as US Fed Funds Futures push out the expected rate rise from September to October (but let's continue to watch this moving goal post). Those keeping an eye on US interest rate futures will have seen that the implied probability of a rate hike in the US moved back a month yesterday (remember you can get free access to this stuff from the CME website - click here), following a drop of 0.9% in US retail sales for December - well below the predicted -0.1%. More important than the size of the fall is the consistency of disappointing retail sales figures in the US, despite a headline unemployment rate of 5.6% and improving GDP growth conditions in the country.

Why is it so important to be keeping an eye on US interest rates? Due to the US dollar's continuing role as the global base currency, the effects of interest rate expectations there and the consequent signals that dictate investor and trader behaviour will either weaken or strengthen the US dollar. As I've been saying for some time, a strengthening US dollar theme is a scary prospect in a world that is still recovering economically, given the effect that low borrowing rates in the US have had on outward investor flows into emerging markets. These emerging markets, once the big drivers of 'beyond-core growth' for the global economy, do not want to see a rising US dollar, given that will only increase the interest expense on debt that has been lent during times when easy money has flowed out of the US. In addition to all of that, Australia certainly doesn't want to raise rates before the US does--which could tempt FX traders to push the AUD higher--and thus the timing of a US interest rate rise will no doubt have a direct impact on Reserve Bank of Australia policy.

The Australian market continues to price in an 80% expectation of no change to official interest rates at the February meeting, and a 20% chance of a decrease to 2.25% - so an increase here is certainly not on the cards. When we throw the upcoming Federal Budget into the mix, this all means flat or lower interest rates for Australians for the foreseeable future, and that probably means a flat to lower currency, stable housing markets and enough consumer confidence to maintain current GDP growth projections - it would be hard to uncover any big surprises in Australia (outside the Federal Budget deficit) after the hammering that we've taken over commodity prices in 2014.

Conditions for equity markets in Australia will likely remain quite similar given all of this information; as I previously stated, a lot of the quick foreign investment money was sucked out of our market last year as the Aussie dollar began to drop, so we're really left with a base of hungry domestic speculators and investors who are trying to get moderate returns in a low interest rate environment. At this stage there are no big event risks that would potentially freeze up credit markets (outside of a surprise from Europe), so the Australian finance sector will probably have a fairly easy time borrowing and lending this year, which may mean less finance names coming to the retail market to source cheap funding - so the pipeline for hybrid securities might a little low this year. But I will remind readers with Rivkin Local access (phone +612 8302 3600 if you don't have it and speak with a Relationship Manager) that our strategic approach to trading Blue Chip shares and buying income from the market are alive and well:

Our two charts today show the little bounce in oil (first) as well as the moves in the Aussie dollar and US dollar index (second). As monetary policy in Europe begins to heat up, the US dollar index will probably tell us less about the state of US dollar strength and more about euro weakness, given the euro makes up almost 60% of the index. Nonetheless you'll see that the US dollar index (orange line, referencing left-hand axis) has stalled again after its latest lift from ~90 to ~92.5.

Also a quick shot of the pool by night at The Legian at the end of today's update!

Today’s charts are taken from the Rivkin Trader platform. 30,000 global instruments available to trade including FX, commodities, index, ETFs and international shares. Trade Australian share CFDs from just $8 or 0.10%. Click here or phone 1300 748 546 to get your free $100,000 demo account.

Upcoming economic announcements: Australian employment report out at 11:30am, German GDP out at 8pm, US initial jobless claims out at 12:30am, all Sydney time.

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