Building on Monday’s relief rally in North America that saw the three main US indices plus the S&P/TSX jump 2.2%-2.4%, overseas markets have been soaring overnight. Asia Pacific trading saw Sydney soar 3.75% and Tokyo climb 3.0%. European trading finds Paris up 3.3%, Frankfurt up 3.0%, Milan up 2.8% and London up 2.2%. Positive momentum has continued into early US trading as well with the three main index futures contracts up 1.4% to 2.0% so far today.
What appeared to start out as a relief rally on short covering, perhaps a short squeeze, has gained more bullish traction after the Reserve Bank of Australia became the second central bank in less than a week to back off from a previously hawkish stance. The RBA announced a 0.25% interest rate increase to 2.60% overnight, which was less than the 0.50% increase the street had expected. Governor Lowe indicated that the bank undertook this smaller increase while it evaluates the outlook for inflation and economic growth. The RBA noted that additional rate hikes are still planned and it forecast inflation of 7.75% for 2022, 4.00% for 2023 and 3.00% for 2024. The Reserve Bank of New Zealand is still widely expected so far to announce a 0.50% rate hike when it meets tonight.
Meanwhile, yesterday’s economic news reflected a softening North American economy. US and Canadian Manufacturing PMI reports both came in below expectations, with Canada dropping below 50 into contraction territory. US construction spending decreased more than feared (-0.7% vs street -0.3%). Inflation clearly has not gone away though as European producer prices in August were up 43.3% over year and 5.0% over the previous month. US factory orders are due at 10:00 am today (street 0.3%), and three more Fed members are speaking. Tomorrow morning brings Service PMI reports from around the world, US ADP payrolls (street 200K vs previous 132K) and trade data for the US, Canada, and Germany.
In other market action, treasury yields continue to backslide with the US 10-year yield falling back under 3.6%, the German 10-year Bund yield back under 2.0% and the 10-year UK Gilt yield back under 4.0%. In currency action, gold continues to rally with a 0.7% gain, and it has regained $1,700/oz. The US Dollar is mixed, gaining 0.9% against the Australian Dollar on the RBA news, but losing 0.6% to the Euro. Bitcoin is up 2.2% suggesting a possible resurgence in risk appetite among investors. Commodity action finds WTI Crude Oil up 1.4% and approaching $85.00/bbl ahead of tomorrow’s OPEC meeting, while copper is up 0.3%.