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European stock markets believe!

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by Peter Switzer

European stocks shot higher overnight in anticipation of good news on Thursday from the European Central Bank (ECB) and mining stocks fared well on the expectation that China will press the button on more stimulation for its economy following some more data pointing to slowing manufacturing.

This tells me the prospect for higher stock prices this year is very likely but don’t expect any good news from the Reserve Bank today, however, given economic data out yesterday, there is a need and a likelihood that we will see another rate cut before Christmas.

US markets were closed overnight for Labor Day. Britain’s FTSE was up 0.82 per cent, the CAC 40 in France put on 1.19 per cent while the German DAX went up 0.63 per cent.

Another stimulus to stocks was the new expectation that the ECB will cut interest rates as well as lay out a plan to keep borrowing costs down for debt-laden European governments. Thursday is going to be a massive day for markets and the ECB boss, Mario Draghi will be the main man.

Given what I’m seeing, stocks such as BHP Billiton and Rio Tinto look oversold and could be a nice play at current prices for longer-term investors.

Aussie data

Looking at yesterday’s data, it does point to a need for a future rate cut. Have a look at these:

Retail trade was down 0.8 per cent with department store sales off 10 per cent, which was the worst in seven years!
Company profits were down 0.7 per cent in the June quarter and that’s now three quarters in a row!
Job ads from ANZ were off 2.3 per cent in August and these have been falling for five months!
Manufacturing actually rose but the sector is still in contraction mode but at least is happening at a slower rate!
Home prices for capital cities are going sideways but are still down around two per cent for the year.
Inflation in the TD Securities’ gauge was up a big 0.6 per cent but when you take volatile items out it was only 0.2 per cent.

Need a rate cut

Collectively this data says we need, and the RBA can afford, given the inflation reading, a rate cut. There has been better data on business investment, economic growth and even the unemployment rate, which does not scream out that a rate cut is essential.

The RBA will wait to see what the ECB does on Thursday and even what the Chinese authorities do before it moves. If we get bad news out of Europe, we could see two or three cuts but if things pan out positively as I expect, then I reckon one more rate cut before the end of the year would be sensible.

Gee, I hope the RBA can actually be sensible rather than excessively cautious which has made life difficult for most businesses in the slow lane of this two-speed economy.

Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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Published on: Tuesday, September 04, 2012

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