Draghi and Trump (respectively) stoke risk appetite; RBA flags rate cuts to come

Risk is “on”

Risk appetite received a shot in the arm overnight – and from two sources. The first came from ECB President Mario Draghi, during a speech he delivered yesterday evening at the ECB Forum on monetary policy, in which he stated that his central bank would be prepared to cut-rates, or even deliver a new round of quantitative tightening, if Europe’s inflation target continues to be missed. The second, perhaps more significant, piece of news came courtesy of a Tweet from US President Donald Trump, which officially announced he would be meeting Chinese President Xi Jinping for an “extended” meeting at the upcoming G20 Summit.

Stocks rally, yields fall, commodities climb

Bond yields have tumbled owing to the Draghi-developments in particular, while equities have responded favourably to both that news and the Trump-tweet. The DAX climbed 2.03% in European trade, as 10 Year German Bund yields fell to -0.32%, and the Euro fell back into the 1.11 handle. The S&P 500 added over 1%, driven by cyclicals and tech-stocks, with the USD lifting slightly. Commodities climbed on hopes for an improved global economic outlook, supporting a lift in the AUD. While the ASX 200 is expected to leap this morning, with SPI Futures point to a roughly 40-point gain at today’s open.

More rate cuts coming

Yesterday, local markets were preoccupied with the release of RBA minutes. Another interest rate cut from the RBA is “more likely than not”. That was the key takeaway for financial market participants. It probably came as a (relatively small) surprise, judging by the price action in response to the news. Although the RBA’s dovishness has long been assumed by the market, yesterday’s minutes was the most explicit the central banks has been about its intentions. Another cut is coming, that much is almost certain; the question remains when that will actually be.

Rate cuts (and more) required to spur economy

That stubborn “spare capacity” issue in the Australian labour market was the core theme in the RBA’s minutes. The other domestic and global risks confronting the Australian economy were touched-on; but overall, on those subjects, the RBA maintained a “glass-half-full” perspective. But the central challenge for the economy is ensuring the necessary conditions exists for continued jobs growth. And that won’t come without a small nudge from lower interest rates, as well as (as the RBA pointedly expressed in its minutes) a concerted push from government, and other policy makers, to reform the economy and provide fiscal stimulus.

RBA Minutes raises growth and inflation concerns

The scale of that challenge drained, marginally, a little optimism from market participants about the prospects of Australian economic growth. The sentiment revealed itself in the behaviour of rates-markets, and the slight contortions in the yield-curve. Government bond yields fells across the board after the release of the RBA’s minutes, it must be said; but the moves were pronounced around the middle-and-back-end of the yield curve. It speaks of a market increasingly bearish on the outlook for Australian growth, and the prospect that the RBA’s objectives, as they relate to the labour market and inflation, will be more than just a trifle challenging to achieve.

July RBA meeting still “fifty-fifty”

As it pertains to the shorter-term fortunes of the Australian economy and financial markets, the Australian Dollar continues to make new lows, though rates markets are still divided on the prospect of interest rate cuts next month from the RBA. The implied number of cuts in the market by the central bank at next month’s meeting has shifted slightly higher to 13-basis-points; but for all intents-and-purposes, that puts the chances of a move in July as a fifty-fifty proposition. It leaves the Australian Dollar vulnerable to rapid moves in either direction, as traders shuffle to accommodate new information, as it comes.

AUD traders to factor in global news

The fate of the currency this week, too, may be more greatly determined by global factors. In particular, the US Fed meets overnight, and are expected to introduce an easing bias into their policymaking. Traders are betting big that in response to a slow-down in the US and global economic outlook, the Fed will be cutting rates, first in July and then once-again before year end. Though the will of the market can’t be denied, the risk is that the Fed doesn’t deliver the dovishness for which markets are hoping. Such an eventuation would surely boost the USD – and likely give the AUD another whack.