Morning Report Wednesday 5 August 2015
Yesterday as expected, the Reserve Bank of Australia (RBA) left interest rates unchanged at an historically low 2% (see chart 1), but they also signaled to the market that they are happier with the lower $A. The RBA dropped their rhetoric around requiring a lower $A, implying strongly to the market that interest rate cuts may be over, sending the $A back over 74c from the mid 72c region (see chart 4). What’s far more important for local equities and especially the “yield play” as we witnessed in April, is the next major move for the bond markets. When 3 year bonds fell 66 points this year (rates up 0.66%), the banking Index corrected over 18% - see charts 2 & 3.
• It's our opinion at MarketMatters that in coming months, local bonds will again fall (rates higher), leading to further weakness in the “yield play” and of course banks.
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