Risk-on an temporary view
Risk appetite has improved globally as weaker US inflation data (CPI 0.2% vs. 0.3% exp) suggest that worries of a quick Fed-tightening cycle is unfounded. Yesterday read point to a significant slowdown the Fed favorite inflation indicator PCE. US equites rallied with S&P 500 trading above 100dama and demand treasuries sent 10 yr yields below 3%. With the FOMC less than 1-month away front end yields remain supportive help flatten the curves toward historical lows. USD remains supportive against EM but lost ground in the G10. We still see the sources of recent USD correction as unrealistic. Our longer term view is unchanged as markets have yet to reprice US slowing growth and EU positive growth outlook. EM inflation outlook has not changed at close to target indicated that a central banks reaction is no expected (expect from Turkey and Argentina). We remain constructive on NOK and CAD (slightly less on AUD) against USD on the commodity rebound story.
Optimism grew as news flow indicate that President Trump might actually achieve a foreign policy coup by halting North Koreas nuclear program at summit planned to 12th June in Singapore. With liquidly lower due to holidays popular opinion is likely to drive price about deeper analysis. This has pushed to the side for now, middle-east tensions between Iran / Israel and news that anti-establishment and anti-EU 5-Star Movements and the far-right league are close to forming an Italy government. Elsewhere, oil prices fell as drop in Iranian exports could be replaced by Saudi and US supplies. Trader should stay cautions, as markets are fickle searching for the latest driver ahead of fundamentals.
Australia’s tax war is on
The Australian dollar was better bid on Friday morning as the USD rally is running out of steam, while the Aussie government unveiled the details of its income tax cut. The Australia dollar had rather a rough first quarter, but it nothing compared to the debasement that took place during the second half of April. Indeed, during that period fell as much as 5.10%, sliding from $0.7813 to $0.7412, amid disappointing economic data that range from stalling inflation pressures to weak retail sales. However, traders were hoping that the much-awaited tax cut promised by the government would brighten the picture in the longer-term.
The government unveiled a tax plan that would mostly benefit the top of the income class, which will do little to effetely boost consumer spending. As expected, it didn’t take very long for the opposition leader, Bill Shorten, to start a tax war with the current government, as he promised to redress this inequality. Therefore, there is now the risk that unhappy taxpayers will turn to the opposition at the next Australian election. A bigger, tax relief could only deplete further the budget balance, anything that investors don’t like.
