OVERNIGHT DATA AND HEADLINES
The U.S. trade deficit increased by the most in more than a year in March as a record drop in exports offset a shrinking import bill, suggesting the coronavirus outbreak was upending the global flow of goods and services. The Commerce Department said the trade deficit jumped 11.6%, the largest rise since December 2018, to $44.4 billion. Economists polled had forecast the trade gap increasing to $44.0 billion in March. Global lockdowns have severely disrupted supply chains and also weighed on demand for goods and services, shrinking economic output.
The U.S. services sector contracted for the first time in nearly 10-1/2-years in April as orders plunged, which could strengthen economists' views that the economy would struggle to rebound from the novel coronavirus-driven recession. The Institute for Supply Management (ISM) said its non-manufacturing activity index fell to a reading of 41.8 last month, the first contraction since December 2009. It was also the lowest level since March 2009 and followed a reading of 52.5 in March. Economists polled by Reuters had forecast the index dropping to a reading of 36.8 in April. The smaller-than-expected decline in the non-manufacturing index reflected a jump in the survey's measure of supplier deliveries to a reading of 78.3 last month from 62.1 in March.
Germany's highest court gave the European Central Bank three months to justify bond purchases under its flagship stimulus programme or lose the Bundesbank as a participant, raising questions about the scheme and the euro's future. The verdict dealt a blow to the unprecedented 2-trillion-euro purchase scheme that kept the euro zone in one piece after its debt crisis but which critics argue has flooded markets with cheap money and encouraged over-spending by some governments. Excluding the Bundesbank, the ECB's biggest shareholder and bond buyer, would jeopardise the viability of the Public Sector Purchase Programme (PSPP) and put a question mark over Germany's role in the euro. The court said the Bundesbank could no longer be part of it "unless the ECB Governing Council adopts a new decision that demonstrates ... the PSPP (transactions) are not disproportionate to the economic and fiscal policy effects," the judges said.
Euro zone producer prices suffered their steepest fall since the 2008 financial crisis in March dropping by more than expected as the COVID-19 pandemic sharply reduced demand for energy. Prices at factory gates in the 19 countries sharing the euro fell by 1.5% month-on-month in March for a 2.8% year-on-year decline. The former was the steepest decline since November 2008. Economists polled by Reuters had expected drops of 1.3% for the month, and 2.6% year-on-year.
Australia's central bank forecast the economy would suffer its largest ever contraction in the first half of the year, sending the unemployment rate into double-digits, but held out the hope of a recovery as the coronavirus was contained. The Reserve Bank of Australia (RBA) ended its monthly policy meeting by holding interest rates at a record low of 0.25%, as expected, and recommitting to buy as much government debt as needed to keep three-year bond yields down near 0.25%. In its policy deliberations, the RBA considered a range of scenarios but the baseline case was for economic output to shrink by 10% in the first half and 6% for all of 2020. That would be followed by a bounce of around 6% next year. The unemployment rate would double to around 10% in coming months and would still be above 7% at the end of next year.
Wall Street's main indexes gained as healthcare stocks rallied, oil prices surged and a number of countries and U.S. states eased coronavirus-induced restrictions in an attempt to revive their economies. Dow Jones gained 0.56% to end at 23,883.09 points, S&P 500 gained 0.90% to 2,868.44 and Nasdaq added 1.14% to 8,810.00.
The USD rose for a third session against most major currencies on Tuesday, in line with U.S. stocks. The DXY index was up 0.27% at 99.79, re bounding from a 99.56 low.
EUR tumbled 0.75% from 1.0920 down to a 1.0825 low, regaining strength into the close at 1.0840.
GBP price action was mixed overnight, trading between 1.2420 / 1.2485.
USDJPY found early strength, falling 0.20% from a 106.89 high down to 106.40 lows.
AUD followed EUR lower initially, dropping towards a 0.6417 low but regained composure to trade a 0.6476 high. Closed lower at 0.6435.
NZD dropped early to 0.6033 but was back up at 0.6075. Gave up small gains into NY close.
AUDNZD reached a 1.0660 high but gave up gains back towards 1.0620.
AUDEUR traded back up to 0.5960 but gave up gains late trading to 0.5935.
U.S. Treasury yields rose as plans to reopen major economies boosted risk appetite on Tuesday, a day after the Treasury Department announced it would borrow a record amount of almost $3 trillion this quarter.
Benchmark 10-year yields rose two basis points to 0.654%.
The yield curve between two-year and 10-year notes steepened two basis points to 47 basis points.
Thirty-year bond yields rose three basis points to 1.327%.
European government bonds lost ground, pushing yields higher, after Germany's top court ruled that the Bundesbank must stop buying bonds under the ECB's stimulus scheme if the ECB cannot justify the purchases.
That manifested in a sharp selloff in Italian government bonds, pushing yields nearly 20 basis points to a week-and-a-half high of 1.947% and leading the gap over safe-haven German Bund yields to 251 bps, the widest in around a week and a half. Italian 10-year yields were last at 1.888%.
Gold steadied above $1,700 an ounce, spot gold was up 0.2% at $1,705.57 per ounce.
Financial markets in mainland China remain closed for the International Labour holiday between May 1 and May 5. Spot prices of iron ore with 62% iron content for delivery to China were unchanged at $84 per tonne last Wednesday.
Industrial metals prices rose - Benchmark LME aluminium was up 0.3% at $1,488 a tonne, snapping three days of losses but still close to a four-year low of $1,455 touched on April 8.
Other metals: LME copper was up 1% at $5,174 a tonne, zinc rose 1.1% to $1,921, nickel gained 1.7% to $12,010, lead added 0.5% to $1,638 and tin was 1% higher at $15,230.
Oil prices soared overnight, as some European and Asian countries along with several U.S. states began to ease coronavirus lockdown measures. The rally extended Brent crude's gains to six straight days, while U.S.WTI has now rallied for five consecutive sessions. Fuel demand worldwide was down roughly 30% in April, but demand is rising modestly due to efforts to lift travel restrictions. Brent crude rose $3.77, or 13.9%, to settle at $30.97 a barrel. U.S. WTI crude futures gained $4.17, or 20.5%, to settle at $24.56 a barrel.
ECONOMIC CALENDAR TODAY
Australia - March retail sales (last 0.5%, forecast 8.2%) - Q1 real retail sales (last 0.5%, forecast 1.8%). Preliminary estimates showed extraordinary stockpiling surge that will drive biggest quarterly volume gain since GFC.
New Zealand - Q1 unemployment rate (last 4.0%, forecast 4.50%) - Lockdown in late March to have a small impact.
New Zealand - Q1 employment (last 0.0%, forecast -0.2%).
Asia - April Nikkei PMIs due for India, Hong Kong and Singapore.
Europe - March retail sales (last 0.9%, forecast -11.3%). Flash GDP has already identified record collapse in activity.
US - April ADP employment change (last -27k). Initial claims have shown an unprecedented rate of job loss.
AUD THOUGHTS AND TECHNICAL ANALYSIS
AUD’s insatiable correlation with stocks and commodities held firm overnight as early S&P futures prices sold off, bringing AUD down to a 0.6417 low before staging a recovery back up towards a fresh high of 0.6476.
AUD opens this morning at 0.6432, stocks and general risk sentiment remain intact for todays events.
The RBA rate decision yesterday was rather uneventful, the bank remaining on hold at 0.25% and in monitoring mode given the significant policy easing in March. The Governor reiterated the Bank’s baseline scenario he mentioned in a speech on 21 April, but the inherent uncertainty of the COVID situation meant the Board was presented with several scenarios. Nothing surprising there. Inflation is expected to remain below the 2-3% target under all scenarios considered. It seems reasonable, therefore, to expect the cash rate and the 3-year yield target to be in place for at least the next couple of years. The Governor noted that the Bank is prepared to scale-up bond purchases and do whatever is necessary to ensure bond markets remain functional and to achieve the 0.25% target for 3-year government bonds. The Bank also broadened the range of corporate debt securities that are eligible as collateral for domestic market operations and will now accept slightly lower rated instruments (but still investment grade).
Today we have Australian tier 1 retail sales data out at 11.30am. The wash up for Q1 is set to show a strong rise in real retail sales. The surge in the March month means nominal sales will be up 2.6% for the quarter as a whole. While the CPI detail showed some relatively strong price gains for food and household goods, the retail deflator as a whole looks to be up about 1%qtr, meaning real retail sales will be up about 1.6%qtr. Note that the wider consumption measures reported in the national accounts may still record a decline for the quarter. Retail makes up about 30% of total spending. Coronavirus effects are likely to see significant weakness in other segments, particularly discretionary services and vehicle purchases and operation (i.e. fuel) which combined make up about 20% of total spending. More generally, spending is set to fall heavily in Q2 as social restrictions impact more fully and stockpiling demand wanes.
Overnight, the focus will shift to the U.S. for the release of April ADP employment. Expectations remain for a significant decrease in the numbers.
For the AUD, resistance is seen into 0.6470 with more located in the 0.6490/95 zone.
Bullish momentum requires further persistent and upbeat risk to test the next levels around 0.6670/0.6700.
The pullback overnight held above the 10-DMA - technical outlook remains bullish, daily RSI rising again.
Further pullback will encounter support at 21 DMA (0.6400) and previous lows at 0.6373.