Australia cuts rates to the lowest ever

Summary:

• Reserve Bank of Australia reduces its cash rate to the record lowest level
• Aussie remains little changed as the move was expected
• NASDAQ (US100) suffered on Monday as US regulators tighten the screws on tech companies

Lowest ever

The Reserve Bank of Australia decided to cut interest rates on Tuesday by 25 basis points pushing its cash rate to the lowest level on record at 1.25%. The decision exerted a modest reaction in the Aussie dollar as it had been fully discounted. The AUD is trading virtually flat after an hour of the decision. What did the RBA communicate? The statement turned out to be balanced as the RBA neither pointed to further rate cuts nor ruled out such a possibility. As it suggested, the decision’s aim was to support the labour market in assisting in reducing joblessness as well as to achieve more progress towards the inflation objective (the central bank wanted to boost its credibility when it comes to fulfilling its mandate). As it did in the past, the RBA underlined that a high level of consumers’ indebtedness and protracted low income growth were among the prime domestic risks to the economic outlook. In terms of external risks it pointed to various trade disputes. Referring to the exchange rate the RBA repeated that the Aussie remained at its low end of the narrow range in recent times. The bank sees headline price growth at 1.75% this year and at 2% in the following year. Looking at the current market pricing one may notice that another rate cut is expected by the end of the summer with roughly 70% probability for such a scenario - based on futures on the Australian cash rate. There is no doubt that a lot will depend on a further development in the US-Sino trade war. If risks de-escalate and the economic outlook become rosier, then risk-related assets could catch a bid and then a high probability of rate cuts in Australia is likely to disappear.

Beyond the RBA rate decision we also got other two readings from the Antipodean economy. Firstly, based on the balance of payments data for the first quarter a net exports contribution to Q1 GDP growth should be 0.2 percentage points (the reading matched expectations) compared to a negative 0.2 pp contribution in the final three months of 2018. The GDP report will be released tomorrow. Although the BoP release ought to be neutral for the Aussie and other Australian assets, the first glimpse at consumer demand in the second quarter does not look so good. Namely retail sales dropped 0.1% MoM in April, falling short of the median estimate of a 0.2% MoM increase.

The Aussie dollar continues marching higher despite the rate cut delivered by the RBA. The first more notable resistance is localized in the vicinity of 0.7020. Source: xStation5

Tech stocks suffer on increased scrutiny

Although Monday’s trading on Wall Street proved to be neutral (the Dow Jones closed flat while the SP500 lost 0.3%), it did not concern the NASDAQ as it slumped 1.6%. Such the gloomy performance came after the two US regulators - the Federal Trade Commission and the Department of Justice - said that they would take the reins in antitrust investigations of Amazon, Facebook, Google and Apple. These shares pulled the NASDAQ down on Monday - Facebook lost 7.5%, Google sank 6.1%, Amazon went down 4.6% while Apple moved down 1%. Let us remind that in the past there were some conjectures that these tech companies might breach some antitrust regulations.

The NASDAQ (US100) fell as much as 1.6% yesterday and from a technical point of view it seems to still have some space to continue this move. Notice that bears may aim at 6800 points where the important support is localized. Source: xStation5

In the other news:

• US administration said that China was misrepresenting trade talks (we got the white paper on this issue from Beijing over the weekend presenting how trade negotiations have been playing out so far)

• New Zealand’s terms of trade for Q1 increased 1% QoQ, above the median estimate of a 0.5% QoQ

• Fed’s Bullard said that a rate cut might be ‘warranted soon’