"Unexpected" Australian Rate Cut To Record Low Unleashes FX Havoc, Global "Risk Off"

Three months ago, when Australia unexpectedly revealed that its recent "stellar" job numbers had in fact been cooked we asked, rhetorically, 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.

Reserve Bank of Australia Governor Glenn Stevens and his board lowered the cash rate by 25 basis points to 1.75 percent Tuesday, a move predicted by just 12 of 27 economists surveyed by Bloomberg. The rest had seen no change. Data last week showed quarterly deflation in the consumer price index and the weakest annual pace on record for core inflation, which the RBA aims to keep between 2 percent and 3 percent on average.

“Inflation has been quite low for some time and recent data were unexpectedly low,” Stevens 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.


"They’re saying that there’s no point in messing around, let’s get in and do this, cut the cash rate and get some of the speculative money out of the Australian dollar,” said Chris Weston, chief market strategist at IG Ltd. in Melbourne.

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.

As a result, the dollar fell to its weakest level in almost a year and stocks declined while Treasuries rose as evidence of limp economic growth around the world permeated through global financial markets. It also meant that gold once again jumped above $1300, while oil has traded on the backfoot near $45 a barrel despite the accelerating dollar weakness, ahead of weekly U.S. government data forecast to show rising stockpiles.

"We’ve started to take a little bit of money off the table,” said Sean Darby, chief global equity strategist in Hong Kong at Jefferies. “There’s quite a bit for investors to digest now after quite a big run-up in markets, particularly after the disappointment from the Bank of Japan last week.”

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.

"Weak earnings and a strong euro are the main triggers for the market being down today,” said Heinz-Gerd Sonnenschein, a strategist at Deutsche Postbank in Bonn, Germany. “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.

“We’re into the May doldrums where people are starting to reconsider portfolios and will probably not do too much,” said Sean Darby, chief global equity strategist in Hong Kong at Jefferies Group LLC. “They’ve either missed the rally from the first quarter or they’re getting a little bit too concerned about some of the weakness in the global data.”

Market snapshot

  • 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

Looking at regional markets, Asian equity markets traded mostly positive with ASX 200 (+0.8%) among the leaders, following an RBA rate cut, while poor China PMI figures increase stimulus hopes. ASX 200 was led by financials after Big-4 bank ANZ recovered from opening losses on optimism regarding the bank's direction, while a 25bps rate cut by the RBA further boosted sentiment. Elsewhere, Chinese markets were mixed with the Shanghai Comp (-1.68%) was weighed by further poor data in which Caixin Manufacturing PMI failed to meet estimates and posted a 14th consecutive month in contraction territory, as the recent data misses increased hopes for additional easing. As a reminder Japanese markets were shut due to Constitution Day and will next re-open on Friday.   

Top Asian News

  • China’s Caixin PMI Slips in April as Pockets of Weakness Remain: PMI from Caixin Media and Markit Economics fell to 49.4 vs est. 49.8
  • Short Sellers Under Fire in Australia as RBA Spurs Stock Rally: Banks lead gains after interest-rate cut, ANZ results
  • Yuan Gains After PBOC Sets Strongest Fixing Rate Since December: PBOC raised daily fixing by 0.04% to 6.4565/dollar
  • China Swap Rate Drops Most in Year as Bond Income Escapes Tax: Policy bank bond yields, benchmark repo rates decline
  • PLDT Profit Falls 34% as Losses From Rocket Internet Persist: 1Q net drops to 6.2b pesos
  • ANZ Rallies as Low-Yield Business Cuts Offset Profit Drop: 1H cash profit A$2.782b vs est. A$3.577b
  • DBS First-Quarter Profit Rises 6 Percent, Beats Estimates: 1Q net income S$1.2b vs est. S$1.04b

European equities have also seen significant downside so far this morning (Euro Stoxx: -1.6%), with the DAX slipping back below the 10000 level. While yesterday's decline in energy prices have helped lead energy names lower today, focus has been some of the high profile earnings from across Europe, with the likes of BMW, UBS, Commerzbank and Lufthansa all seeing downside in the wake of their updates. Bunds have seen upside today, with prices back above 162.00, while peripheral debt markets have seen Portuguese paper lifted by the latest sovereign update from DBRS, which has abated some of fears from last week as this would mean that Portuguese bonds are still eligible for ECB QE. Meanwhile, analysts at Informa note that BTP/Bonos are lower by around 1.5bps in the wake of soft demand for the BP Vicenza IPO, whereas for Spain the EU extension for the nation and their deficit goals has offset some of the concerns following the countries inability to form a government.

Top European News

  • European Commission Sees U.K. Referendum Risks as Forecasts Cut: Predicts 2016 growth will slow to 1.8%, 2017 will be 1.9%
  • U.K. Manufacturing Unexpectedly Shrinks as Firms Hemorrhage Jobs: Markit PMI drops to 49.2 from 50.7 in March
  • BMW First-Quarter Profit Falls 2.5% on Self-Driving Shift: BMW sticks to forecast for slight earnings growth in 2016
  • Commerzbank Profit Halves as Market Turmoil Hurts Revenue: Earnings beat analysts’ estimates even as revenue declined
  • BNP Paribas Profit Unexpectedly Rises on Lower Provisions: Pretax profit at corporate and institutional bank falls 55%
  • Lufthansa Fares Under Pressure as It Grapples With Restructuring: Carrier says revamp is beginning to deliver cost turnaround
  • Philips to List Lighting Unit After Failing to Find Buyer: Dutch manufacturer to list at least 25% stake, will seek to sell remaining shares in coming years

in FX, it has been a lively start to the European session, with the RBA rate turning AUD lower after attaining .7700+ levels vs the USD. Elsewhere though, fresh USD selling has been the early theme against the rest of the majors, led by EUR/USD through the 1.1500's, tipping 1.1600 by some 15 ticks so far. USD/JPY took out support ahead of 106.00 to extend losses through to 105.55, but some nervousness at these levels sees us some 20 ticks or so higher since. Cable made strong gains through to 1.4770, but a weak UK manufacturing PMI number, below the 50.0 pivot (49.2) has sent GBP reeling, with the EUR/GBP rate through .7870 extending Cable losses to just below 1.4700, though tentatively so as yet. USD/CAD finally took out 1.2500 to trip stops down to 1.2460/61, but we are back above 1.2500 again as Oil takes a hit. Oil prices have already been on the wane, but clearly preceded by stock market weakness, which looks set to impact on FX today. Swedish industrial production much better than expected, knocking USD/SEK down to just under 7.9000.

In commodities, WTI and Brent have shaken off some of their recent gains after the continuation of the fallout from the Genscape report which noted a build in cushing stockpiles, Gold has still be rising after a week USD is helping boost safe haven demand. Silver has been trading sideways after reaching the USD 18.00/oz level yesterday and is currently just shy of that level. Elsewhere, copper and Dalian iron ore futures were weaker following the recent discouraging Chinese PMI releases, with the latter declining by nearly 6% intraday as increasing stockpiles also weigh.

On today's US calendar, highlights include Redbook weekly sales, the ISM New York, US IBD/TIPP Economic Optimism, API Crude Oil Inventories and earnings from Pfizer and CVS Health.

Bulletin Headline Summary from Bloomberg and RanSquawk

  • European bourses slump with sentiment dampened from soft Chinese Caixin Manufacturing PMI figures alongside a slew of weak earnings updates.
  • USD-index briefly slips below 92.00, subsequently lifting EUR/USD above 1.1600, while gains in GBP are capped as Manufacturing PMI figures fall into contractionary territory.
  • Highlights include US IBD/TIPP Economic Optimism, API Crude Oil Inventories and earnings from Pfizer and CVS Health.
  • Treasuries rally in overnight trading amid drop in global equities and oil as evidence of limp economic growth around the world permeated through global financial markets.
  • The European Commission told the euro area’s largest economies to reduce debt and modernize labor markets as it again slashed its inflation forecast and warned of slower- than-predicted growth across the 19-nation bloc;  ECB publishes indicative calendar for TLTRO-II operations
  • U.K. manufacturing unexpectedly shrank for the first time in three years in April, dealing a shock blow to the economy after growth slowed in 1Q. Markit Economics said its factory Purchasing Managers Index dropped to 49.2 from 50.7 in March
  • Australia’s central bank cut its benchmark interest rate 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
  • Australia injected a double-dose of stimulus as the government handed down an expansionary budget hours after the central bank eased policy for the first time in a year
  • A private gauge of Chinese manufacturing slipped in April, underscoring pockets of weakness in an economy weighed by overcapacity and weak external demand
  • The Federal Reserve is set to propose so-called stays on derivative contracts that would prevent counterparties from immediately pulling collateral from a failed bank. The plan is meant to give authorities ample time to unwind a firm
  • UBS Group AG said 1Q profit dropped 64%, missing analyst estimates, as market turbulence eroded earnings at the wealth-management and securities units. The shares plunged
  • Commerzbank AG fell as much as 9.4 percent in Frankfurt, the most in almost three months, after market turmoil and a squeeze to margins hurt sales and halved first-quarter profit
  • BNP Paribas SA, France’s largest bank, posted a surprise increase in first-quarter profit as a decline in provisions for bad loans helped outweigh a slump in trading revenue. The shares rose
  • Sovereign 10Y bond yields mostly lower; European equity markets drop, Asian markets lower (Japan closed); U.S. equity-index futures fall. WTI crude oil drops, metals higher

US Event Calendar

  • 8:55am: Redbook weekly sales
  • 9:45am: ISM New York, April, no est. (prior 50.4)
  • 10am: IBD/TIPP Economic Optimism May, est. 46.5 (prior 46.3)
  • Wards Domestic Vehicle Sales, April, est. 13.4m (prior 12.97m)
  • 10:30am: Fed’s Mester speaks at Amelia Island, Fla.
  • 2pm: Fed’s Williams on Bloomberg Radio
  • 4:30pm: API weekly oil inventories
  • 7pm: Fed’s Lockhart speaks in Jacksonville, Fla.

DB's Jim Reid concludes the overnight wrap

With newsflow relatively light over the past 24 hours, we’ll start this morning with firstly acknowledging one of the most memorable sporting upsets of all time. With odds of 5000/1 at the start of the season, Leicester City were last night crowned deserved Premier League champions after Chelsea battled back to rescue a draw against Spurs. As regular readers will know your EMR authors have to endure the emotional rollercoaster that is supporting Liverpool (me), Arsenal (Craig) and Nick on my team (Spurs) and despite all too brief moments of excitement in doing so, have also become sadly accustomed to the title falling to one of Man United, Man City or Chelsea for longer than we’d care to remember. So it’s hard for us not to enjoy this fairytale moment for Leicester fans. Our research COO is a big Leicester fan and as he pays the bills a big congratulations to him this morning. To put into context just how much of an outside bet Leicester were for readers less familiar to what has played out, there were actually shorter odds for The Queen having the Christmas Number One (1000/1) and Kim Kardashian being US President (2000/1). I suspect Elvis working down the local chip shop might have also been more likely at the bookmakers.

Over in the markets and much like how the last week of April played out, the first day of May was a poor one for the US Dollar which saw the Dollar index fall another half a percent to mark a fresh year-to-date low. In fact the index has now fallen for six consecutive sessions and is now over 7% off its January highs. The weakness in the Greenback did however help to kick start US equities on a strong footing in May with the S&P 500 returning +0.78% and so wiping out over half of last week’s loss. The Bank Holiday in the UK meant trading volumes were thin in Europe and price action relatively benign. The Stoxx 600 (-0.07%) finished with a very modest loss with peripheral markets generally being the underperformer there.

The main focus yesterday and a contributor to that weakness for the Dollar was the ISM manufacturing data. The reading printed at 50.8 in April which is down a full point from March and more than what the market had expected (consensus expectation was for 51.4). The print also matched the manufacturing PMI after there was no change in the final revision. In terms of the details, the new orders component declined 2.5pts to 55.8 although that is still well above where it printed in December at 48.8. Employment rebounded 0.9pts to 49.2 but still remains in contractionary territory, while inventories declined 1.5pts to 45.5. A positive aspect of the data was the second consecutive print above 50 for new export orders (+0.5pts to 52.5) and in turn marking the best level since November 2014, indicating some stabilisation and positive feed through from the weakness in the currency. We’ll get the ISM non-manufacturing data tomorrow but it’s worth mentioning that the spread between the two series got back to 2.7pts last month which was the least since December 2014. The current market consensus for this month’s non-manufacturing print is 54.8 which implies a spread of 4pts however. If correct, that will be the most since January.

Onto the latest in Asia this morning where bourses in Hong Kong aside it’s actually been a relatively positive start for markets in the region. Gains are being led out of China where the Shanghai Comp and CSI 300 are +1.44% and +1.62% respectively. The Kospi (+0.43%) and ASX (+1.58%) are also in positive territory, but the Hang Seng (-1.19%) has reopened on the back foot after markets were closed for a public holiday yesterday. Markets in Japan are shut for a public holiday of their own today (and will remain shut until Friday) although that hasn’t stopped the Yen from rallying further this morning. It’s close to +0.30% firmer and closing in on breaking though the 106 level.

There’s been some data released overnight too and it’s come in China where the non-official Caixin manufacturing PMI revealed a 0.3pt decline to 49.4 (vs. 49.8 expected). Meanwhile as we go to print the other main news overnight is out of the RBA have who have announced a 25bps cut in the benchmark rate to a new all time low of 1.75%. The move was only expected by 12 of 27 economists according to Bloomberg and has resulted in the Aussie Dollar falling nearly 2% from its pre-decision highs.

Yesterday also saw the release of the Fed’s Senior Loan Officer Opinion Survey. The April survey results showed that on balance, banks tightened lending standards on commercial and industrial loans during Q1, but that lending standards on loans to households were said to have eased. A modest net fraction of banks were also reported as easing standards on credit cards and consumer loans, while there was little change in standards for auto loans. With regards to the energy sector specifically, banks were reported as saying that they expect delinquency and charge-off rates on loans to firms to deteriorate over the reminder of the year and that the majority of banks have taken a variety of actions to mitigate loan losses over the past year, including tightening lending policies on new lines of credit, restructuring outstanding loans or requiring additional collateral.

There was also some Fedspeak for us to digest last night. San Francisco Fed President Williams reiterated that he expects the Fed to move interest rates ‘gradually back to a more normal level over the next couple of years’ but highlighted that the new long-term normal rate could be significantly lower than what the Fed’s dot plots imply.

Switching to the micro and in terms of the corporate earnings results yesterday, of the 12 S&P 500 companies to report 8 exceeded EPS expectations. That’s below the run rate for the year which is unchanged at 77%, while sales beats continue to hover around 57%. Weakness in Oil prices did little to dent moves for the energy sector. WTI (-2.48%) defied the move lower for the US Dollar and declined back below $45/bbl following some bearish OPEC output numbers and also rising oil stockpiles in the latest Genscape data. Elsewhere moves for rates markets were headlined by further weakness for US Treasuries, with 10y yields up another 4bps yesterday and hovering around 1.873%.

The only other remaining data in the US yesterday was the March construction spending numbers (+0.3% mom vs. +0.5% expected). In Europe the main data flow centered on the April manufacturing PMI’s. The Euro area reading was revised up a modest 0.2pts to 51.7 while on a regional basis there were actually downward revisions to both Germany (-0.1pts to 51.8) and France (-0.3pts to 48.0) while the peripherals generally exceeded expectations. Italy printed at 53.9 (vs. 53.0 expected), a rise of 0.4pts, while Spain printed at 53.5 (vs. 53.0 expected), a rise of 0.1pts.

Looking at the day ahead, the calendar is relatively sparse today. This morning in Europe we’ll get the manufacturing PMI for UK, followed closed by the March Euro area PPI data. Alongside this will be the release of the latest European Commission economic forecasts. Over in the US this afternoon there’s more regional manufacturing data with the ISM NY, while the May release for the IBD/TIPP economic optimism data is also due. Later on this evening the main focus will be on the April vehicle sales data which is expected to show a rebound. Away from the data we’ll hear from the ECB’s Couere early this morning, while this afternoon the Fed’s Mester is set to take part (at 3.30pm BST) in a panel discussion on ‘unusual monetary policy’ and the affect on market liquidity. The Fed’s Williams is also due to speak again at 7pm BST. Earnings wise we’ve got 37 S&P 500 companies set to report including Pfizer. In Europe we’ll get 21 Stoxx 600 reports including UBS, BNP Paribas and HSBC.