Asia Pacific · Australia · Banks · BoJ · Bonds · Brexit · Central Banks · China · Commodities · Commodities Volatility · Currencies · ECB · Econochat · Economic Outlook · Emerging Markets · Europe · Eurozone · Fixed Income · Interest Rates · JAPAN · Markets Commentary · Markets Data · Monetary Expansion · North America · OIL · Opinion · Risk · Stock Markets

Markets Commentary

“Unexpected” Australian Rate Cut To Record Low

  • Fx Havoc
  • Global “Risk Off”

Three months ago, when Australia unexpectedly revealed that its recent “stellar” job numbers had in fact been cooked some analysts wonder why the sudden admission it was all a lie? Simple: weakness in commodity prices “is far greater than people had been expecting,” the nation’s top economist said. Australia is now “swimming against the tide” because of uncertainties in the global economy, he added. Which we translated as follows: “we need more easing, and to do that, the economy has to go from strong to crap.” And with the Australian economy suddenly desperate for lower rates from the RBA, one can ignore the propaganda lies, and focus once again on the far uglier truth.

Overnight this was finally confirmed when in a surprise move, Australia’s central bank cut its benchmark interest rate for the first time in a year to a record low and left the door open for further easing to counter a wave of disinflation that’s swept over the developed world. The move sent the local currency tumbling and local stocks climbing.

Inflation has been quite low for some time and recent data were unexpectedly low,” Stevens, RBA Governor, said in a statement. “These results, together with ongoing very subdued growth in labor costs and very low cost pressures elsewhere in the world, point to a lower outlook for inflation than previously forecast.”

As Bloomberg reminds us, Australia’s central bank acted after two regional neighbors stood pat last week – New Zealand and Japan. Illustrating the impact of central bank decisions on exchange rates, the Aussie has the weakest performance among the G-10 since last Wednesday, a day before the Bank of Japan and Reserve Bank of New Zealand meetings. The announcement sent the AUDUSD plunging.

In some way’s Australia rate cut had been telegraphed earlier in the aftermath of last night’s latest disappointing Chinese Manufacturing PMI number, which as we reported contractde for the 14th straight month, and not only missed but dropped to 49.4 after a brief March bounceback from February lows.

Perhaps more importantly, the plunge in the AUD caused havoc across other key carry trades, and following a nearly 200 pip plunge in the AUDJPY, the Yen soared once more, this time surging to the highest against the dollar since August 2014, pushing the pair as lows at 105.600, and dragging risk assets lower with it.

Analysts at Rabobank noted the dollar’s fall towards 105 yen from as high as 122 only a few months ago, a remarkable move that will do nothing to relieve the deflationary pressures in Japan and which reflects “the broader problem of unconventional monetary policy reaching its limits just like conventional policy already has”

It wasn’t just central banks: commercial banks were also responsible for today’s weakness.:

  • UBS Group AG fell 5.8% after reporting worse-than-forecast first-quarter net income.
  • Commerzbank AG lost 6% after its profit more than halved.
  • HSBC Holdings Plc erased gains to fall 0.7 percent after posting a drop in profit.

“What markets need most right now is to see better numbers from the economic indicators in Europe and a better view from companies on their future earnings.”

So far it has not seen that, and making matters worse, the European Commission said hours ago that growth in the Eurozone and the wider European Union will be slightly weaker this year than previously forecast, as it warned that the economic slowdown in China and other emerging markets, geopolitical tensions and uncertainty ahead of the U.K. referendum on EU membership could weigh on the economy.

The EU’s economists also cautioned that the strength of factors that have been supporting growth in the region, such as low oil prices and a weaker euro, could start to fade, while fundamental problems in many of the bloc’s economies, including high levels of private debt and unemployment, continue to hold back the economic recovery. The commission now expects the rate of inflation in the eurozone to be just 0.2% this year, down from the 0.5% previously forecast. In 2017, inflation in the currency union is now seen at 1.4%, down from the 1.5% predicted earlier and still below the close-to-2% targeted by the ECB.

 

Markets this morning:

  • S&P 500 futures down 0.7% to 2059
  • Stoxx 600 down 1.3% to 337
  • FTSE 100 down 0.7% to 6196
  • DAX down 1.6% to 9957
  • German 10Yr yield down 2bps to 0.24%
  • Italian 10Yr yield down less than 1bp to 1.47%
  • Spanish 10Yr yieldunchanged at 1.58%
  • S&P GSCI Index down 0.7% to 352.7
  • MSCI Asia Pacific up less than 0.1% to 130
  • Nikkei 225 closed
  • Hang Seng down 1.9% to 20677
  • Shanghai Composite up 1.8% to 2993
  • S&P/ASX 200 up 2.1% to 5354
  • US 10-yr yield down 5bps to 1.82%
  • Dollar Index down 0.54% to 92.12
  • WTI Crude futures down 1% to $44.33
  • Brent Futures down 1% to $45.37
  • Gold spot up 0.5% to $1,298
  • Silver spot up 0.4% to $17.61

 

Top Global News

  • Australia Cuts Key Rate to Record Low, Pulling Down Currency: Australian dollar slumps as much as 1.5% following decision
  • UBS Profit Misses Estimates on Lower Wealth, Trading Income: Investment-banking unit sees profit slump 67% in first quarter
  • HSBC’s Quarterly Profit Beats Estimates as Costs Contained: Operating expenses fell 6.6% in quarter from year earlier
  • Fairway Group Files for Bankruptcy as Competition Revs Up: Gourmet grocer lists $387m in debt, $230m assets
  • J&J Faces 1,000 More Talc-Cancer Suits After Verdict Loss: Jury awards $55m to woman who blamed talc for cancer
  • Einhorn’s Greenlight Buys Yelp, Takes Macro Bet on Natural Gas: Hedge fund says mobile app company can double revenue by 2019
  • Mylan Sees Profit Rising About 16%, Generic Prices to Drop: CEO committed to closing Meda acquisition
  • Apple CEO Says He ‘Could Not Be More Optimistic About China’: Tim Cook spoke in interview on CNBC
  • Aeropostale Prepares to File for Bankruptcy This Week: WSJ
  • EU Commission Doubts Trade Deal With U.S. Possible: Sueddeutsche
  • U.S. Grain Cos. Plan to Reject New Monsanto GM Soybeans: WSJ
  • ADM, Bunge Not Accepting Soybeans W/ Unapproved Monsanto Trait
Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s