Market Update – December 2012
Provided by Dalton Nicol Reid

The RBA has lowered interest rates to 3%.

This is GFC like lows and has the following implications for markets:

  1. Term Deposit rates will likely drop to the low 4% range (perhaps below). As a consequence we can expect on-going interest in yield oriented stocks and hybrids as clients look to take on more risk to maintain their income.
  2. Currency. The currency reacted by moving up slightly after the announcement. This highlights that a 25 bp cut was very much expected. However, as the interest rate differential between Australia and the globe declines, interest in our currency would be expected to fall. The currency seems well supported by offshore buying at present so it is difficult to have conviction regarding a pullback but should this emerge it would be positive to companies with offshore earnings.
  3. Domestic cyclicals. Domestic confidence remains weak. Will this cut be enough to stir some demand? We think it will depend on the sector. Those sectors competing with offshore competition will remain difficult until the currency pulls back. However, the cut will be cheered by retailers heading into Christmas and will be helpful for the housing sector as it will improve affordability.
  4. Cash rates are now below the 10 year bond rate. As a crude measure when the cash rates are above bond rates (as they have been) it signals a slowing domestic economy. It is positive to see this turn around as it means the market is anticipating a pick-up in domestic activity.

Kind regards
FWO Chartered Accountants