Peak Optimism or Overly Bearish?

A flood of better-than-expected corporate quarterly earning was a wake-up call to overly pessimistic investors. Snap and Twitter posted solid 1Q results triggering a broad-based rally in large-cap tech, propelling the S&P 500 to new all-time highs. Snap’s revenue, generated from selling advertising, rose 39% to $320.4m well above analyst estimates of $306.6m. In commodities expectations for harder US stance on Iran sanctions pushed oil prices higher causing energy complex to gain. The USD gained against G10 currencies as opportunities in the US equity markets attracted capital globally. In addition, the higher yields (despite risk appetite improvement treasuries gained) makes the capital rotation extra sticky. It’s unlikely that the greenback dominance will fade anytime soon. Volatility is lingering around a diminishing 12.54 further encouraging risk-taking.

Overnight, China’s stocks were unable to maintain the strong goodwill as concerns over the direction of monetary policy were questioned. However, any adjustment to the PBoC dovish tone and prospect of further stimulus measures is due to improving the economic outlook. Given the incoming data, we are cautiously optimistic on China stabilization. In this context commodity prices, including crude oil and industrial metals, look cheap. China 1Q GDP came in at 6.4% y/y driven by industrial production growth. 2Q exports should rebound as a likely US-China trade deal is near and global demand continues to firm. The surge in domestic and external demand suggests that markets have underestimated China growth prospects. With policy to remain supportive of economic “green shoots” although new stimulus might not be necessary has indicated that recent Politburo meeting. It’s hard to image stocks heading higher form these lofty height however, with lower event risk, supportive central banks and improving global macro-economic backdrop corporate earnings should further improve.

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Australian shares in spree as rate cut expected in May

It’s a bullish start of the week for Australian equities and a good kickoff on public holidays. The Reserve Bank of Australia (RBA) policy minutes have already had an effect, but the recent quarterly inflation data releases is a confirmation that the RBA next step will be a rate cut. The cash rate of 1.50% is already at historical low and largely below neutral level. Both q/q and y/y headline CPI came largely below expectations, pointing at 0% (0.20%) and 1.30% (1.50%), lowest since 2016.

The reaction on the markets was not long in coming. The muted inflation figure combined with a slight rise in unemployment figure had investors selling the Aussie and becoming the major G10 currency loser of the day while Australian S&P ASX 200 gained as much as 1%, closing at 6382.14, its highest range since December 2007 with exporting companies benefitting the most. A profit-taking session is therefore very likely.

In light of the recent events, we expect AUD weakness to accelerate ahead of 7 May 2019 monetary policy meeting while elections following right after should have a different impact. Currently trading at 0.7044, AUD/USD is heading along 0.7030 short-term.

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