Global equities are jittery this week led by weakness in Asian and European stocks. The German DAX has fallen 3% this week and below its psychological level of 10,000. Concerns over China and global economy resurface as China’s latest manufacturing and services PMI data came below expectation. After positive March’s trade balance, the market was expecting an uptick in PMI for confirmation that China is recovering and government’s stimulus is working.
Global equities look tired and expressing investors’ fears over diminishing return of monetary policy easing. After a nervous start beginning of the year, equities rallied after ECB and BOJ expanded their easing program, US Fed revised their rate hike projection and other central banks eased further. In a world of very low bond yields and negative in some countries, investors look for alternative ways to seek returns on their wealth, equities being an obvious choice. The question is whether the equity risk premium is justified; will easing by central banks able to produce economic growth, increase consumption and companies’ earnings. Diminished confidence in the effectiveness of central banks’ actions and doubts over companies’ earnings projection may cause further sell off this month, perpetuating the adage “Sell in May and go away”.
RBA’s quarterly Statement on Monetary Policy is to be released today and will be closely analysed for any revision in inflation and economic growth forecast, and the reasons behind Tuesday’s cut. This will provide guidance whether the RBA will cut again this year. While yesterday’s retail sales and trade balance were positive, the AUD was weighed down by falling commodities prices (focused on copper and iron ore) and return of USD strength.
US monthly employment data tonight will shed further light on the state of US labour market. A solid hourly earnings 0.3%+ and new jobs of 210k+ may force “data dependent” US Fed to hike rate in June/July. Prospect of RBA easing again and US Fed hiking sooner than expected will return the focus on central banks divergence, the main theme in 2015. This could potentially push the AUDUSD lower to 0.72-0.73.
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