19th May 2020 - Markets buoyed by vaccine hopes, risk on sees AUD above 0.6500.



Good morning

OVERNIGHT HEADLINES AND DATA


  • A gauge of global equity markets surged 3% and oil rallied to highs last seen in mid-April as data from an early-stage trial for a coronavirus vaccine lifted hopes of a faster recovery from the pandemic-driven economic slump.

  • Drugmaker Moderna Inc said its experimental COVID-19 vaccine showed promising results in a small early-stage trial, and its stock jumped 22.2%

  • Japan's economy slipped into recession for the first time in 4-1/2 years in the last quarter, putting the nation on course for its deepest postwar slump as the coronavirus crisis ravages businesses and consumers. Monday's first-quarter GDP data underlined the broadening impact of the outbreak, with exports plunging the most since the devastating March 2011 earthquake as global lockdowns and supply chain disruptions hit shipments of Japanese goods. The world's third-largest economy contracted an annualised 3.4% in the first quarter, preliminary official gross domestic product (GDP) data showed, less than a median market forecast for a 4.6% drop.

  • France and Germany proposed on Monday a 500 billion euro ($543 billion) Recovery Fund that would offer grants to European Union regions and sectors hit hardest by the coronavirus pandemic, pushing up the EUR and bringing down Italian bond yields. The two biggest EU countries proposed that the European Commission borrow the money on behalf of the whole EU and spend it as an additional top-up to the 2021-2027 EU budget that is already close to 1 trillion euros over that period. The proposal moves the EU more in the direction of a transfer union and is likely to please countries like Italy or Spain which have long called for more joint action in response to the crisis.

  • On Wall Street the benchmark S&P 500 was on track for its biggest one-day percentage gain in six weeks. Dow Jones rose 932 points, or 3.94%, to 24,618. The S&P 500 gained 97 points, or 3.40%, to 2,960, and the Nasdaq added 223 points, or 2.48%, to 9,237.

CURRENCIES

  • The USD fell overnight, pressured by strength in the commodity sector, down 0.80% towards 99.55 (from 100.56).

  • EUR jumped 0.90% higher at 1.0915 after rising as high as $1.0927, its strongest since May 4. 

  • GBP climbed off eight-week lows as broad USD weakness helped it jump up 0.83% to a 1.2227 high.

  • USDJPY see sawed in between 107.20 and 107.50. 

  • AUD catapulted 1.70% up through 0.6500 to reach a 0.6528 high.

  • NZD followed higher, leaping 1.77% higher or 100 points from 0.5945 towards a 0.6045 high.

  • AUDNZD fell back from the lofty 1.0830 highs below to 1.0778 but was back at 1.0800 into the NY  close.

  • AUDEUR ranges were smaller, trading between 0.5950 and 0.5990.


TREASURIES

  • U.S. Treasury yields advanced as investors grew optimistic about a potential vaccine that could help fight the coronavirus pandemic, boosting overall risk appetite as stocks and oil gained as well. 

  • U.S. 30-year yields climbed to eight-week peaks, 10-year rose to two-week high and the two-year advanced to a one-week peak. 

  • U.S. 10-year yields rose to 0.735% from 0.64%, after rising earlier to 0.744%, a two-week high. Yields on U.S. 30-year bonds were at 1.445%, up from 1.32%. Earlier, 30-year yields rose to 1.46%, the highest since late March.

  • On the short end of the curve, U.S. two-year yields were last at 0.181%, up from Friday's 0.149%, hitting a one-week high earlier of 0.185%.

  • The yield curve steepened for a second straight day on Monday, with the spread between the 10-year and two-year widening to as much as nearly 56 basis points, the widest spread since March 20. 

  • Italian government bond yields fell to their lowest level in over a month after France and Germany on Monday proposed a 500 billion euro ($543 billion) recovery fund offering grants to regions hit hardest by the coronavirus crisis. 10-year Italian government bonds fell 18 basis points to 1.67%, its lowest in over a month & German 10-year Bund yields rose as much as 6 basis points to a 2-1/2 week high.


COMMODITIES

  • Gold retreated from a more than 7 year high, as stocks and oil surged on optimism surrounding the trial of a potential vaccine. Spot gold fell 0.7% to $1,728.72 per ounce after hitting its highest since October 2012 at $1764.55.

  • Dalian iron ore futures jumped as much as 7.5% as port inventory in China dropped to the lowest in more than three years, adding to concerns over supply. The most-traded September iron ore on China's Dalian Commodity Exchange ended the session up 5.4% at 691.50 yuan ($97.22) a tonne, marking its biggest one-day gain since July 9, 2019. Spot cargoes of the benchmark 62% grade scaled a two-month peak at $91.70 a tonne.  

  • Industrial metals prices jumped, with copper rising as much as 3%. LME 3 month copper was up 2.6% at $5,317.50 a tonne and headed for its biggest daily gain since mid-April. Other metals: LME aluminium up 2.4% at $1,496.50 a tonne, nickel rose 3.3% to $12,250, lead gained 4% to $1,664 and tin was 2.2% higher at $15,295.

  • Oil prices jumped to their highest in over two months on positive early results on a potential coronavirus vaccine, optimism about a resumption in economic activity and signs producers were following through on planned output reductions. Brent futures for July delivery rose $2.31, or 7.1%, to $34.81 a barrel, while U.S. West Texas Intermediate (WTI) crude rose $2.39, or 8.1%, to $31.82. That was the highest settles for Brent and WTI since March 11, just a few days after prices started to collapse following the failure of a production cut agreement between OPEC and Russia. 


ECONOMIC CALENDAR TODAY

  • Australia - May 2 ABS weekly payrolls (special release on impacts of COVID on jobs and wages).

  • Australia - RBA minutes. May provide a little more colour on views set out in SMP.

  • Japan - March industrial production (last -3.7%). Final read. Prelim showed output was weak in all sectors.

  • Singapore - Q1 GDP %yr (last -2.2%, forecast -2.3%). A deeper shock expected for Q2.

  • Europe - May ZEW survey of expectations. April saw a rebound from the collapse in March.

  • UK - March ILO unemployment rate (last 4.0%, forecast 4.60%). Set to mark an abrupt turning point in labour market trend.

  • US - April building permits (last -6.8%, forecast -25.9%). Both permits and housing starts set to collapse amidst severe disruptions in April.

  • US - April housing starts (last -22.3%, forecast -21.9%).


AUD THOUGHTS AND TECHNICAL ANALYSIS


A ‘risk on’ session developed overnight, fuelled by comments from company Moderna Inc, that its experimental vaccine for COVID-19 showed promise in early trials and looked to advance the vaccine into late-stage trials in July. 

What developed was a market wide rebound in most asset classes, the exception being the USD as most currencies vaulted higher against it. AUD jumped through most of its topside resistance levels breaking through 0.6500 once again to see a late high recorded at 0.6529. U.S. equities, commodities and JPY sales drove AUD/JPY near 70.00.


Today in Australia we have the May 2 ABS weekly payrolls release which will reflect a more up to date state of play in relation to Australian jobs and wages. Expected to show a worsening result in the underlying data.

The RBA minutes are also released and should relay some more colour on the RBA stance in monetary policy however the impact should be minor given most of the information was provided in the latest statement of monetary policy. Offshore data will be of interest particularly in Germany, UK and the US with major tier 1 releases.

For the AUD, opens this morning at 0.6525 with technicals reversing and leaning more bullish, daily RSI rising, AUD above 10-DMA and a bull pennant forming.

AUD bears made three attempts to break 0.6400 but failed which places AUD with a good chance to rally higher. The price action now has technicals highlighting upside risks. AUD trades above the 10- and 21-DMAs, daily RSI is rising while monthly RSI is poised to turn higher and a bull pennant is forming on daily charts. A break of the pennant top would suggest bigger gains are due. Bulls will have to be cautious of May global PMIs later this week. Estimates call for improvement from April results. Upside surprises are possible as economies shuttered by COVID-19 continue to reopen. Upbeat results would bolster AUD bulls' confidence, potentially paving the way for a test of the 0.6665/0.6685 zone, where the 200-DMA, 76.4% Fibo of 0.7032-0.5510 and April monthly high sit. In order for AUD bears to take back control a break of key support near 0.6370 is needed.



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