Economic Insights

U.S. equities close at new high while Shanghai stocks slump

The U.S. Dow Jones Industrial Average (DJIA) climbed another 38.16 points overnight, reaching another historical high and breaking the record made in 2007. Blue chip stocks chose to ignore downside risk despite negative news hovering around the world, such as China’s tightening fears, Italy’s uncertainty, and even the sequester effect in its home land.

The Federal Reserve (Fed) Quantitative Easing (QE) plays a role here, besides attracting more investors to the “value based approach.” Overnight Stocks rose from the earlier drop after Federal Reserve Vice Chairman Janet Yellen said the U.S. central bank should stick with USD85 billion in monthly bond buying. She also highlighted her personal view that the Fed has not reached a stage to discuss withdrawing QE. Thus, the market might pay too much attention to the few “hawkish” members who have little influence on the committee.

In China, the Shanghai composite index did not look good yesterday; the index plunged at 3.65%, lead by the real estate sector. Some property stocks were even forced to stop trading when they hit the 10% cap intraday. The message from the China’s cabinet on 1 March put tightening fears on the stage, raised down-payment requirements and interest rates on second-home mortgages, and ordered individuals selling properties to “strictly” pay a 20% tax on sale profits when original purchase prices are available.

Australian retails sales rebound

Australian Retail Sales rose 0.9 % from a month earlier, which fell a revised 0.4% in December last year. The sales also rose 3% on the YoY basis. The result is largely driven by household goods and other retailing, echoing Governor Stevens’ view that there is some effect now.

Source: Bloomberg

In addition, Gross Domestic Product (GDP) net exports rose to 0.6 from the previous 0.1, indicating that 4Q GDP carries some upside movement as iron exports to China surged.

Reserve Bank of Australia (RBA) will unlikely lower Official Cash Rate (OCR) to 2.75%

Although the Reserve Bank of Australia (RBA) tended to be dovish in recent months, I still think the central bank will leave the OCR unchanged at 3%. Below is a summary on recent RBA comments at its testimony. I think the chance of the rate cut is low as the central banks’ tone still suggests a “standby” instead of a cut today.

• RBA governor Glenn Stevens said there was a good deal of interest rate stimulus in the pipeline in his semi-annual testimony; it is having an effect.
• RBA expressed the view that the OCR at 3% was justified. However, Stevens turned “dovish” as he said a “rate cut will be more likely than rate increase.”
• Intervention will be available if the Aussie is “seriously overvalued” and the market behaves irrationally.
• Once the U.S. and Japan lower the rates, the Aussie will be in favor, policy makers may pay attention.

Previous Daily Market Report: Daily Market Report for 1 March 2013: China’s Manufacturing Shows Less Expansion