ASX at the close

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Stan Shamu for Chris Weston, Chief Market Strategist at IG Markets

RBA cuts but AUD rallies

The much anticipated May Reserve Bank of Australia meeting has finally delivered a rate cut. Economists and the market were both expecting a cut and after a couple of months of holding fire, the central bank finally acted. The RBA cut rates by 25 basis points to 2% which was in line with market expectations. However, the statement was perhaps a little more upbeat than some would have expected. Improved trends in household demand, stronger employment growth and consistency in targeting inflation were the positives. To the downside, a drag on private demand will impact capital expenditure across the mining and non-mining sectors, while public spending is scheduled to be subdued. The RBA sees moderate growth in credit and said it is working with other regulators to assess and contain risks that may arise from the housing market. In conclusion, the RBA said the inflation outlook provided the opportunity to ease further at today’s meeting so as to reinforce recent encouraging trends in household demand. In a nutshell, it gave no hint of further easing and sounded like it is done with this easing cycle. Some are wondering why the RBA wouldn’t keep the easing bias in its language to keep the AUD lower.

AUD/USD rallies while ASX 200 drops

The price action in response was extremely choppy with the AUD initially falling while the ASX 200 rallied. However, these moves were short-lived as it didn’t take investors long to realise the shift in language from the statement. AUD/USD dipped below 0.7800 before rallying to 0.7900. Clearly traders were skewed to the short side and as some of those positions were closed out, the momentum swung very quickly. Meanwhile, the ASX 200 rallied before turning negative. ANZ was one of the few companies to maintain solid gains as investors cheered the company’s first half results. A cash profit of $3.68 billion was above a $3.64 billion estimate with lending driving revenue. However, NIM dropped to 2.04% from 2.15% as competition is getting intense for the lenders. Remember, Westpac’s NIM came in at 2.06%, which is perhaps what helped drive stronger lending for ANZ. The bank’s capital position seems reasonably sound and it expects to maintain a payout ratio in the 65%-70% range.

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Bond selling continues

Bond market weakness has been a key theme across the US and European markets. This has left many wondering whether we can keep seeing yields and equities rise in unison. A number of reasons have been floated for the selling in bonds but so far this hasn’t had much of an impact on equities. Dovish comments by Fed members David Rosengren and Charles Evans helped keep US equities drifting higher. Evans stated that he sees no compelling reason to raise rates in 2015 while Rosengren said the Fed may need to delay hiking if the economy does not pick up as expected. The latter was hardly surprising though given the Fed has reinforced its data dependency. This will keep this week’s non-farm payrolls data in focus as investors continue to look for clues of where policy is headed. While last month’s reading was disappointing, it was hardly enough to form a trend and these readings also tend to be revised. This makes this week’s reading even more compelling to watch. The greenback has managed to remain bid against the majors and this could accelerate if we get some solid numbers this week. In US trade today we have trade balance and the ISM non-manufacturing PMI due out.

Weaker open for Europe

Ahead of European trade we are calling the major bourses weaker with the exception of the FTSE which was closed yesterday and missed out on gains. A dip in EUR/USD helped sentiment across the region and if that trend can continue then we could see equities recover. On the calendar we have the French government budget balance, Spanish unemployment change and the EU’s economic forecasts. In the UK, we have construction PMI but this is unlikely to be a big market mover. The interesting observation will be whether the FTSE can hold onto the gains while the rest of Europe struggles.