Fiscal cliff talk commands sentiment; Euro flirts with $US1.30
True to recent form, the impending fiscal cliff continued to guide sentiment overnight as markets watched for any signs of progress. Comments from House speaker John Boehner highlighted the fragility of the negotiations, stating: "no substantive progress has been made," while suggesting the Democrats "have yet to get serious about real spending cuts." Thursday, President Obama had allayed market fears by suggesting a "framework" can be put in place before Christmas.
While markets may have responded in kind to signs of progress and the odd upbeat comment, its apparent deep-seated divisions will see another lengthy and arduous period of negotiation. Although there appears to be political will, we believe a lack of momentum surrounding talks will begin to infiltrate market psyche once again. If this scenario should materialise, the US dollar is primed for a period of rejuvenation based on a move back to perceived safe haven units. Amid the conjecture surrounding the US fiscal cliff, markets also digested a handful of economic data points.
US Gross Domestic Product rose 2.7 percent in annual terms in the third-quarter, up from 2-percent growth in the second. Economist's consensus estimates show a slightly higher 2.8 percent growth rate was expected.
Personal Consumption Expenditure rose 1.4 percent in Q3, down from 2-percent. The core reading ticked down to 1.1 percent in the third-quarter, from the expected and previous growth of 1.3 percent.
Pending home sales outpaced expectations with a 5.2 percent rise in October, against expectations of 1-percent. In annual terms pending sales rose 18-percent. Extremely low mortgage rates appear to be spurring the US housing recovery, with the average 30-year mortgage falling to a 41-year low of 3.31 percent according to Freddie Mac.
Meanwhile the Euro has well and truly reclaimed the $US1.29 handle while briefly edging over 1.30 amid solid gains from European equities, with the Euro Stoxx 50 index finishing 1.37 percent on the day. Robust demand for Italian debt at auction also inspired gains with debt yields falling to their lowest levels in 2-years.
Capex caps Aussie; Tuesday's RBA policy decision in frame
Although sentiment barometers such as the S&P 500 forged gains, the performance across commodity bloc currencies resembled a mild risk-off environment, led lower by the Aussie dollar which settled deeper into the 104-handle to lows of 104.17 US cents.
Despite stronger than expected third-quarter CAPEX data, the Aussie began a moderate decent in the ensuing period which we believe was a result of a weaker investment intentions component of the index. Total new capital expenditure rose 2.8 percent in the third-quarter, down from second-quarter growth of 3.4 percent. Nevertheless, although the investment intensions of Australian businesses were 17.1 percent higher than the 2011/12 financial year, the data showed a 3.3 dip from previous estimates, led by an 8.1 percent drop in mining. This may add weight to the case for Stevens and Co to make an 'insurance' cut at Tuesday's meeting which will be there last chance until February 2013. Interbank cash rate futures now show around a 74 percent chance of a 25bps cut from around 60 percent earlier in the week.
Local data on the docket today includes private sector credit for October scheduled for release at 11.30 AEDT. Overall we anticipate a fairly slow day, with regional equity activity likely to direct sentiment, in turn the Aussie's appeal. Buying activity between the 104 and 104.15 US cents should contain a deeper trough for now, but see little cause for a re-test of yesterday's highs above just 104.8 US cents.