All year I’ve toyed with two ideas like a cat with a ball of string. One was that the Aussie dollar might buck expectations and rise over 2019.
The second was the trials and travails of the Big Four banks. Both are coming to the fore right now.
ANZ came out with its results yesterday. The flat result was no surprise to Mr Market. He’d been expecting nothing more.
But it does support our recent case that we’re in a stock picker’s market.
I don’t see how the index can lift in a big way until at least each of the Big Four banks results are all out and digested.
Only then can Mr Market look to the future with both eyes ahead…
Right now, he has one eye on unexpected remediation expenses and another on the mediocre metrics ANZ put out (as will their peers).
My eyes went over the full year report on ANZ yesterday. It occurred to me, following on from Monday’s discussion, that Quantitative Easing (QE) is more likely than not.
Why so? One factor dragging down the banks is their shrinking net interest margin. This, in turn, is lowering their return on equity.
The banks are running out of room to lower their deposit rates and hence their cost of funding in that space.
There is some room, as I understand it, for their cost of wholesale funds to go lower.
This, then, is why the Reserve Bank would buy Residential Mortgage Backed securities, as some have forecast. It will do this by printing money.
The pitch is that it would lower mortgage rates across the economy.
But it could also be a subtle way for the RBA to bolster bank profits that are suffering under its low rate regime.
What else could we look for?
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More job losses coming so banks can cut costs
Earlier in the year I said to expect the banks to take a chainsaw to their costs.
That would make me very nervous if I happen to work at one. Employees make up a massive 60% of their operating expenses.
The big question is how (and how long it takes) the banks leverage their massive brands and scale while reducing the head count and automating what they can?
One wonders, however, if such strategic calculations matter to the retail, especially retiree, investor.
For all my gnashing of teeth, the Big Four are still profitable and paying dividends that look appealing enough with deposits and bond rates at what they are.
Our hypothetical retiree will also look at the newspaper and see that Melbourne and Sydney property prices are stabilising after their bear market.
That de-risks the banks further and improves the vibe around the general outlook. Perhaps our retiree will park his money in bank stocks on these factors alone.
Only time can tell. We need all the results out before we make any grand conclusions.
Where do we look in the meantime? My eyes are drawn to the rising Aussie dollar now.
Decisions to make about the Aussie Dollar
At the start of the year I tabled this possibility as a contrarian take on events. I pointed to Australia’s rocketing exports and potential (then) current account surplus.
I noted the prevalence of people saying the dollar could go under 60 cents. The sentiment appeared universally bearish.
I thought it might be time to go the other way.
The market dutifully ignored my idea and drove the dollar down anyway. That sent the Aussie gold price shining even brighter.
But the Aussie dollar has drifted up since September. The Fed cutting rates appears the immediate catalyst.
I’m not sure. There is some evidence to suggest that the level of credit creation in the economy plays an influential role in setting the exchange rate. We know the big Aussie banks are relatively tight still.
Third quarter results from the US suggests banks over there are much looser and operating in a very different dynamic.
This situation is unlikely to change in the next quarter. Such an idea suggests the Aussie dollar staying buoyant for the moment.
Hmm. Take the above with a grain of salt. It’s a tentative thought for now, not something to back up the truck over.
What I do know is that the common refrain — that interest rate differentials explain currency movements — doesn’t cut the mustard.
Australia had a higher rates than the US for a long time and the currency went down regardless. There is some other major variable in play.
But a rising Aussie dollar invites more market intervention from the Reserve Bank of Australia to meet its policy objectives. It could print Aussie dollars to weaken the currency, too.
The rest of this year could be Mr Market wondering what the central planners decide to do to get us out of the mire that put us in in the first place.
Stay tuned. The Aussie economy and markets look hostage to the next run of the printing press.