Markets Today: Back on a 78 handle

Broad USD dollar weakness and higher oil prices have boosted risk assets overnight with energy and material shares the outperformers in both Europe and the US.

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Broad USD dollar weakness and higher oil prices have boosted risk assets overnight with energy and material shares the outperformers in both Europe and the US.  Commodities are higher across the board while commodity related currencies sit at the top of the G10 leader board with the JPY the only currency weaker against the USD.

While energy and materials helped equity indices move higher, Goldman Sachs better than expected results (revenue fell less than expected) also boosted bank shares. In contrast weaker results from Netflix and IBM dragged technology share lower with the NASDAQ index bucking trend, ending the day lower at -0.40%.

RBA governor Stevens gave a speech in New York (titled “Observations on the Current Situation”) which had an international rather than domestic focus. The speech was a strong call for greater fiscal action as well as an admission that monetary policy has reached its effective limit. Stevens argued that central banks can only do so much – monetary policy can only solve monetary issues and fiscal policy – infrastructure spending – should be revisited to boost growth further. So although the speech had a medium term focus, it also portrayed the view that the Governor is a reluctant cutter. Also, the fact that Stevens omitted any comments on the currency may suggest the recent rise in the AUD is not yet at a level where the RBA thinks it could complicate the rebalancing in the Australian economy towards non-mining activity.

On that point it is interesting to note that broad US dollar weakness overnight has helped the AUD/USD trade back above 78 cents for the first time in 10 months. The pair briefly traded above the figure a few minutes before 5pm, but softer US housing data (Housing starts fell 8.8% in March to its lowest level since October) boosted the case for a lower for longer Fed, weakening the big dollar along the way.

The NZD/USD is the top performer amongst G10 currencies up 1.38% and back above 70cents since mid-June last year. Gains in the currency pair were also helped by a relatively positive GDT dairy auction (+3.8% and close to expectations). The NOK has also performed well (+1.23%) while the JPY was the only G10 looser. News that the Abe government is considering a postponement of the planned sales tax increase due to Kumamoto earthquake appears to have contributed the Yen weakness overnight.

The positive tone to the overnight session pushed core global yields higher with the softer than expected US housing data triggering a brief rally in US treasury yields. In Europe, 10y Bunds ended the day 1bps higher at 0.168% and 10y UK gilts closed at 1.50%, up 3bps. 10y UST treasury yields reached an overnight high of 1.8045%, but are now currently trading at 1.785%, practically unchanged from their Sydney closing levels.

Coming Up

This morning in Australia we get the leading index reading for March along with skilled vacancies (also for March), both data releases, however, are unlikely to trouble the scorers.

Of more interest, this morning we also get Japan’s trade data. The seasonally adjusted trade balance is expected to have climbed to ¥450bn in March from ¥166bn previously. Like in recent months, however, Japan’s exports are still expected to have remained subdued, hindered by soft demand from Asia and a stronger yen. The decline in oil prices on the other hand is also seen as the major cause for the decline in imports. Overall, from a BoJ perspective another soft export print should add to the case of further easing by the Bank at its next policy meeting next week.

Today we have no notable data releases in continental Europe, but across the English Channel the UK releases its labour data for February. The three month rolling unemployment is expected to remain at 5.1%, but the risk is that we might get a lower print aided by an unchanged participation rate. Meanwhile the headline rate of growth in average weekly wages is expected to have risen to 2.4%yoy from 2.1% in January. All that said, a stronger set of data print is unlikely to instigate any policy action by the BoE ahead of the EU referendum later in June.

Looking over the other side of the Atlantic, the US prints mortgage applications (Apr) and existing home sales (Mar). The rebound in the pending sales index points to existing home sales rising to about 5.35M from February’s surprisingly weak 5.08M.

Overnight

On global stock markets, the S&P 500 was +0.30%. Bond markets saw US 10-years +1.40bp to 1.79%. On commodity markets, Brent crude oil +2.68% to $44.06, gold+1.5% to $1,252, iron ore +4.1% to $62.85. AUD is at 0.7813 and the range was 0.7746 to 0.7826.

Good luck,

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