S&P500 & Oil At 10 Month Highs, Brexit To Weigh On Sentiment, RBA Leaves Rates On Hold, ASX SPI200 Futures Down 18 Points

The S&P500 edged to a 10 month high on Tuesday as the market pushes back the expected time frame for a rate hike providing near-term support for equities. The S&P500 gained +0.13% while the Nasdaq100 fell -0.23% with December 2016 the first month with at least even odds for a rate hike implied by Fed Fund futures. While the prospect of delayed rates should continue to be support for equities and weigh on the US Dollar, leading into the June 23rd Brexit referendum I expect volatility to pick up as this weights on sentiment globally, the markets loath uncertainty. Current polls suggest this is far too close to call, perhaps similarly to the Scottish referendum in 2014 before the remain camp surged ahead at the 11th hour by a 10 point margin. I'm not saying the Brexit vote will play out the same way, but perhaps as the vote approaches in 15 days from now we will see opinion sway towards the remain as voters ponder the unknown risks of leaving the EU.

European equities gained following the release of the revised third estimate of Euro-Zone GDP for Q1 that increased 1.7% from a year earlier against expectations of 1.5%, German industrial production (YoY Apr) also gained 1.2% against expectations of a 1% increase. The FTSE100 & DAX30 both gained 0.18% & 1.65% respectively while the Euro was relatively unchanged, up 0.01% against the US Dollar.

Oil closed above US$50 per barrel for the first time in more than 10 months as a survey by Bloomberg reported that inventories will decline ahead of the Energy Information Administration (EIA) crude oil inventories report on Wednesday with both WTI & Brent crude finished 1.33% & 1.84% higher respectively. Elsewhere commodities were mixed, Copper fell -3.14% as stockpiles increased, Natural Gas gained +0.32% as did Iron Ore up 2.80%. Precious metals Spot Gold and Spot Silver were both -0.12% & -0.52% weaker despite a -0.05% drop in the US Dollar as the prospect of eventual higher rates reduce demand.

Locally the ASX200 gained +0.20% as did the Australian Dollar up +1.23% following the Reserve Bank of Australia meeting where the cash rate was left unchanged at 1.75%. The statement accompanying the announcement highlights that while there is continuing growth, particularly in exports business investment continues to decline. Overall labour costs and inflation remain low, suggesting there is further scope for the RBA to cut rates later in 2016 if necessary however for now I see the RBA keeping a wait and see approach as they await for the impact of the rate cut last month to work its way through the economy. Importantly there are signs dwelling prices are beginning to creep higher however changes implemented by APRA over the past year have strengthened lending standards, which was a key concern preventing  the RBA from lowering rates sooner. Overall low rates will continue to help transition the economy away from one primarily driven by mining investment to a focus on services however this takes years not months. Meanwhile ASX SPI200 futures are down 18 points in overnight trading suggesting a weaker open this morning.

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Data releases:

·         Japanese Trade Balance and GDP (QoQ Q1) 9:50am AEST

·         Australian Home Loans and Investment Lending (MoM Apr) 11:30am AEST

·         Swiss CPI (YoY May) 5:15pm AEST

·         UK Industrial and Manufacturing Production (YoY Apr) 6:30pm AEST

·         UK NIESR GDP Estimates (May) 12:00am AEST

·         EIA Crude Oil Inventories (June 3rd) 12:30am AEST

·         New Zealand RBNZ Rate Decision 7:00am AEST

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This article was written by James Woods – Global Investment Analyst, Rivkin Securities Pty Ltd. Enquiries can be made via info@rivkin.com.au or by phoning +612 8302 3600.