The share market had its worst day in over a month yesterday. The ASX 200 fell by 1.7% to close at 5,636.
What caused the selloff? The RBA’s decision to keep rates on hold, combined with better than expected trade data, were the main factors.
The markets had widely expected the RBA to keep rates at 2%. So their decision to do just that didn’t catch investors by surprise.
In their official statement, the RBA indicated that only future economic data would determine its next move. That’s left the market uncertain. No one is any clearer on when the next rate cut could take place. Some economists now think that rates have bottomed out at 2%.
Let’s take a closer look first at what the RBA did say. What exactly does future economic data refer to? Are they referring to the GDP growth data due out later today? Not likely.
Economists already predict the results will show the economy grew by 0.9% in the first quarter. That’s an improvement over earlier predictions, which had growth penned at 0.6%. What’s more, projections for the year have edged up to economic growth of 2.1%. That’s not likely to send rates falling again. It will give the RBA another reason to keep rates on hold in the near future.
But by remaining cryptic about their future monetary policy, the RBA inadvertently affected the value of the dollar. Their statement was key in sending the dollar shooting up above $0.77 cents.
By refusing to give the market clues about future rate cuts, the dollar had nowhere to go but up. That’s normal. The dollar and interest rates have an inverse relationship. When one goes up, the other goes down.
And it was the dollar’s gains yesterday that had the strongest impact on stocks.
Why mining stocks had a particularly bad day
A rising Aussie dollar was the main reason why mining stocks fell. BHP Billiton [ASX:BHP] lost 3%, closing at $28.33. Rio Tinto [ASX:RIO] lost 1.6%, finishing on $56.49. The third biggest Aussie miner, Fortescue [ASX:FMG] held its ground, finishing on $2.38.
It’s easy to explain why mining stocks fell on a stronger dollar. The industry is reliant on the price of commodities. A stronger AUD makes resources more expensive to export. That in turn affects projected exports and cash flows. Needless to say, mining investors react nervously to signs of potential declines in exports.
On top of that, investors were still reeling from the business capital expenditure figures from last week. The capex projections for next year are set to fall by $104 billion, with miners contributing heavily to cutbacks.
But it could have been worse for the mining sector. If it wasn’t for encouraging trading data, investors may have sent shares tumbling further.
The ABS released figures showing net exports had surged by 24% in the March quarter. That positive news came on the back of rising iron ore prices, which have settled above US$63 a tonne.
This wasn’t enough to keep the rising dollar from affecting investor confidence.
It would help the mining industry if the dollar falls back below US$0.75. A weaker dollar — combined with rebounding commodity prices — would make mining stocks much more attractive. But the RBA’s unwillingness to shed more light on future rate cuts will make it harder for the dollar to fall.
How the banking sector performed
It wasn’t just the miners who had a bad day on the share market. All sectors took a hit too, with banks suffering just as badly.
Westpac [ASX:WBC] lost 2.4%, finishing on $32.34. That was followed closely by Commonwealth Bank [ASX:CBA] which fell 1.75%. ANZ [ASX:ANZ] lost 1.3% of its value, settling on $32.42.
Banking losses are easier to explain. The capex figures already dampened prospects for broader lending increases over the next year. And now the decision to keep rates at 2% will further limit lending growth across the economy.
But another interest rate cut could provide a shot in the arm for consumer and business lending to increase. It would also help lift investor confidence across all sectors of the share market.
Contributor, The Daily Reckoning
PS: The stock market is showing signs of cracking. The ASX is in real danger of a major correction in the near future. In fact, falling share prices already point to an imminent collapse.
The Daily Reckoning’s Vern Gowdie believes we’re going to see a catastrophic crash in stocks. Vern is the award-winning Founder of the Gowdie Family Wealth advisory service. He’s been ranked as one of the Australia’s Top 50 financial planners. And he thinks the ASX could lose as much as 90% of its $1.8 trillion value.
That’s why Vern’s written ‘Five Fatal Stocks You Must Sell Now’. In this free report, Vern wants to help you avoid the coming wealth destruction. He’ll show you which five blue chip Aussie companies could destroy your wealth. And you almost certainly own one of them. To find out how to download the report, click here.