- Rebound in Chinese PMIs fuels rally in global stocks, dollar advances
- Pound outperforms as ‘soft’ Brexit outcomes or long extension seem likely
- Aussie drops after RBA recalibrates language
Stocks and dollar cruise higher as China-induced rally lingers
Global equity markets started the second quarter on a strong footing, after a decent set of PMI data out of China during the weekend calmed some nerves around the global growth outlook, amplifying the appeal of riskier assets. Wall Street shares rallied, with the benchmark S&P 500 (+1.16%) index closing at its highest level since early October, rising in lockstep with US Treasury yields as traders diverted funds away from the safety of the bond market.
In the FX universe, the dollar index climbed further as the sharp rebound in US bond yields added to the reserve currency’s shine. The greenback also capitalized on some further weakness in the euro, which took a fresh hit after euro area inflation figures disappointed, adding more fuel to concerns about the bloc’s economic health. Yet, both the loonie and sterling outperformed the dollar, the former drawing strength from another leg higher in oil prices and the latter by the latest developments in the Brexit saga.
Pound outperforms even as Parliament rejects all indicative votes (again)
The British pound gained ground across the board on Monday, despite what at first glance seems like a discouraging set of headlines from the UK. Namely, the nation’s Parliament voted on alternatives to the prime minister’s deal again, including the prospect of a customs union with the EU and another referendum, though none of these proposals commanded a majority. Hence, the political landscape remains as uncertain as ever, with no clear way forward and the threat of a no-deal exit still lurking in the background.
However, scratching beneath the surface, there may be some cause for optimism. The motion for a customs union was defeated by a narrow margin of three votes, while other ‘soft’ proposals like another referendum also gathered considerable support, despite ultimately losing. In the eyes of investors, these may have been signs that MPs are slowly but surely watering down their stance on these ‘soft’ outcomes. In the bigger picture, it currently looks all but inevitable that the UK will ask for a long extension at the extraordinary EU summit called for next week. That could further diminish the odds of an ‘accidental’ no-deal and thus, help to keep a floor under the pound over the next days.
Aussie takes a hit as RBA adjusts policy language
The Reserve Bank of Australia (RBA) kept its policy unchanged earlier today, in line with expectations. The statement accompanying the decision contained some small yet potentially important changes. Specifically, the Bank adjusted the final paragraph of its statement – which is usually considered the most important part – to reflect increasing caution. The officials omitted a phrase that holding policy unchanged would be consistent with sustainable growth and achieving the inflation target over time, noting instead that they ‘will continue to monitor developments’.
Evidently, market participants interpreted this change as laying the groundwork for a formal shift in communication later on, perhaps foreshadowing the introduction of an official easing bias amid weakening momentum in the economy. The result was a notable drop in the Australian dollar, which fell as investors priced in an even greater probability for RBA rate cuts before the end of the year.
