4 Developments Affecting Global Markets Today

There are four developments today that impact global investors.

The first is that the Reserve Bank of Australia delivered a 25 bp rate cut but signaled in its statement that is has returned to a wait and see mode. The Australian dollar initially was sold to just below $0.7790 and quickly rebounded to nearly $0.7920 before the buying faded. It settled in a $0.7860-$0.7885 range.

The monetary policy statement at the end of the week will likely confirm that the RBA is not in a hurry to cut rates again. The labor market appears to have stabilized, and household demand has improved. Many had been anticipating another cut next quarter, and this will be reconsidered now.

Second, the UK reported a poor construction PMI. It fell to 54.2, nearly a two-year low, from 57.8 in March. The PMI peaked in January 2014 at 64.6 and returned near there last September. The slump follows the disappointment last week with the manufacturing PMI (51.9 vs 54.0--originally 54.4). This has given rise to some speculation that, ahead of the election, businesses pulled back. While this is one explanation, the construction sector was a laggard in Q1 as well.

Meanwhile, polls show little change ahead of Thursday's election. However, there does seem to be a small shift taking place toward the Conservatives over the last few days. It appears more in the press reports and commentary than the polls. Reports also indicate a shift at the bookmakers in the implied seat allocation. While polls are sometimes wrong, as in the Scottish referendum, the gamblers sometimes get it wrong as well, like in the 2010 UK election.

Sterling spent last week above its 100-day moving average but finished the week below it. It now blocks the upside (~$1.5155). Support is found ahead of $1.5080. A break signals scope for half a cent decline.

Third, Europe is pulled in two directions. The EU revised its growth projection for the area to 1.5% this year from 1.3% forecast in made in February. Easing of monetary policy, lower oil prices, and the euro's depreciation are among the factors cited. However, most of this reflects the upgrade in Germany to 1.9% growth from 1.5%. French growth was revised to 1.1% from 1.0% (but the 2016 forecast was shaved by 0.1% to 1.7%). The third largest economy in the EMU, Italy, was left unchanged at 0.6% growth this year.

At the same time, it slashed Greece's growth to 0.5% this year from 2.5%. Next year's growth forecast was cut to 2.9% from 3.6%. This translates into higher debt/GDP projections. It underscores the IMF's concern expressed yesterday that Greece's debt is unsustainable. What was initially projected to be a primary budget surplus of 3% is now project (apparently by the Greek government) to be a 1.5% deficit.

This has seen Greek debt instruments sell off hard, unwinding some of their recent gains. Having reached a low of 9.88% yesterday, the 10-Year yield is now at 11.12%. European shares are mixed, but the Greek stock market is off 3%, led by a nearly 5% decline in the financial sector.

The euro tested the $1.1060 area today after nearing $1.13 at the end of last week. This is the top of the old range that was broken last week and now acts as support. The $1.1050 area corresponds to a retracement objective from the last outside up day posted on April 23. Ahead of tomorrow’s US ADP data, which steals some of the thunder from the national report at the end of the week, the market may be hesitant about taking the euro through the $1.1160 area.

Fourth, the US reports the March trade balance. Some payback is expected for the smaller than expected February deficit ($35.44), which was a multi-year low. The Bloomberg consensus calls for a $41.7 bln shortfall. However, the impact on Q1 GDP revisions may be minor if the deficit is not far from the three-month average of $41.2 bln, which is about what the GDP estimate assumed. The big question is how big of a drag will net exports be on Q2 growth.

Since April 2014, the 200-day moving average has capped the backing up in US 10-Year yields. It caught last July’s spike, the backing up in rates last September and again held this past March as it was approached. It comes in today near 2.19%. Even if one is not technically-minded, this may be an important area to note.