US and European equity indices had a solid night with gains in financial and technology shares leading the move higher. The USD was stronger against most other currencies although GBP was the outperformer. Meanwhile US Treasury yields ended the day higher along the curve.

Strong US new home sales data and a seemingly growing perception that the economy can cope with a gradual rise in US interest rates were seen as the catalyst for the increase in risk appetite. The bullish market mood was also helped by the positive tone from Europe. European markets reacted positively to news that the Brexit camp is in disarray along with another poll showing the Bremain camp comfortably ahead. So although the USD had a solid night, outperforming 9 of the G10 currencies, the British pound was by far the outperformer, gaining 1% against the USD. Evidence of bounded rationality (sticking to the status quo given lack of quality information to make the change) appears to be emerging among voters with the latest poll showing that older voters, who are more likely to vote and who previously backed leaving the EU, are switching sides to the Remain camp. Comments from BoE Carney also helped the Pound noting that if Britons voted to remain in the EU, the next move in the key policy rate would probably be up, while a Leave outcome wouldn’t automatically bring about an easing.

The AUD (-0.65%) is closer to the bottom of the G10 leader board just ahead of the Euro ( -0.72%) and JPY (-0.73%). The AUD traded to a low of 0.7145 early in the overnight session, and then it staged a small recovery to be currently trading at 0.7182. However most of the damage had been done earlier following comments from RBA governor Stevens at a briefing in Sydney yesterday afternoon.

Although Governor Stevens did not make any attempt to jawbone the currency, noting that the currency was “doing what you’d expect it to do at the moment”, it seems that the FX market treated the Governor’s comments on inflation that it is “probably a little bit too low at the moment” as an opportunity to sell the currency.

In our view the Governor’s remarks were fairly measured and although he noted that inflation is running below the banks 2%-3% target, he also said it’s “not a rigid thing that requires a knee-jerk response”. On this score we would note that the rates market reaction to the Governor’s remarks was fairly muted with local yields ending the day practically unchanged along the curve.

In commodities oil prices climbed higher supported by the expectations that output disruptions will help alleviate the oversupply in the market. Gold lost nearly 2% with US cash rate repricing expectations weighing on the yellow metal. Copper gain 0.8% and after yesterday’s fall, iron ore took breather and is practically unchanged at $51.4.

Coming Up

This morning in Australia we get skill vacancies and Construction Work Done for Q1. The later kicks off the start of GDP partial prints ahead of the March GDP number due for release on June 1st.

Our economists note that for some quarters now, the Construction Work Done release has been a “triple trend” composite indicator:  rising dwelling investment, flat non-residential building investment, and declining engineering construction. This trend is expected to be repeated in the March quarter with a composite 1.25% decline in overall Work Done – similar to the market consensus of -1.5% q/q.

Ahead of the Australian data releases, New Zealand delivers its trade balance for April ($25m exp vs $117m prev). NZ new residential lending figures are out this afternoon..

In Europe, Germany gets its IFO survey for May and the US has a few data releases, but none of them are likely to be market moving. For choice, the advance goods trade balance for April could be the pick of the day. Last month exports and imports were depressed by seasonal adjustments due to the early Easter, higher oil prices in April and the Easter effect reversal are seen as the major reasons for a bigger deficit this month ( $60bn exp vs $56bn prev). Other data releases include House Price Purchase Index (Q1) along with the Markit US Services and Composite PMIs (both for April). As for Fed speakers we have Fed Kaplan and Kashkari on the roster.

Finally, the BoC makes its rate decision and while an unchanged rate is universally expected, we think the relative upbeat tone from the April meeting is likely to be substituted by a more explicit easing bias.

Overnight

On global stock markets, the S&P 500 was +1.37%. Bond markets saw US 10-years +2.79bp to 1.86%. In commodities, Brent crude oil +1.49% to $49.11, gold-1.8% to $1,227, iron ore +0.3% to $51.36. AUD is at 0.7185and the range since yesterday 5pm Sydney time is 0.7148 to 0.7196.