Boing….markets bounce.

The catalyst for catastrophe has been neutralised for the moment as you can see in the price action in the run up to and subsequent to the vote on Greek Austerity. Since Monday’s lows the AUD has risen almost 3 cents, Australia’s 3 year swap rate is around 20 bps higher and the S&P 500 is up almost 50 full points.  Our local equity market is likely to benefit again today as should markets across Asia.

In the chart above you can see that the S&P is still firmly within its uptrend from the lows and that the price action related to Greece over the past week or so has potentially put a floor under the market and that it is ripe for a short term technical bounce. We’ll see obviously but with this and the Dow both looking the same and retaining their bellwether status for markets its important to watch. Mewdium term we have a jaundice view of the economic outlook so if/when prices push through recent lows it will be a signal for a deeper retracement. But now may not be the time.

 The question of whether or not this week’s overall bounce is rational would be a fair one but the answer would depend on the context. That is, which bit was irrational? The pessimism induced weakness in assets with the tag “risky” or the subsequent bounce.

Take the 3 year swap rate for example, while I’ve been out of the office for a few days Bloomberg shows a low of 4.91%. Now the way a 3 year swap works is that you pay a fixed rate for that period, in this case 4.91%, and receive the market 90 day BBSW rate. So you swap payments, you pay fixed and receive floating. Your risk is the difference between the two cash flows. But with the RBA having a firm tightening bias, even if they are on hold for the moment, and with 3 month BBSW having been setting around 5% for a while now unless you think the RBA isn’t going to tighten rates, hedging your fixed rate borrowings for 3 years at a rate that is below the 90 day set looks like a free kick.

So the 20 bps point increase to 5.11% this morning seems a more rational price point given the atmospherics in the Australian economy and the RBA’s tightening bias than the move down to 4.91% which is pricing in economic catastrophe and RBA rate cuts. Indeed it’s why on Tuesday when I wrote the quick Ooooh Please… piece that i said,

So its probably a good time to lock in borrowing rates for corporates.

The AUD and equity markets are not so simple though longer term and while the Greek vote forestalls problems for Europe now it does not change the growing sense that global economic growth is deteriorating. So if we are right that this is a return to post crisis growth trend rather than just a soft patch then ultimately we are likely to see a downgrade to profit and growth expectations which will undermine so-called risk assets.

But for now ebullience is back in vogue and markets are rallying. Let’s hope it lasts – it’s much more fun.

greg@lighthousesecurities.com.au

www.twitter.com/gregorymckenna

This blog is for information only and does not constitute advice. Neither Greg McKenna nor Lighthouse Securities has taken your personal circumstances, objectives or financial situation into account. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation or needs.

If you do need economic, investment or financial advice we are happy to help.

Please Email the team at Lighthouse at info@lighthousesecurities.com.au or Greg directly on greg@lighthousesecurities.com.au

 

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