US equities one percent lower, Europe flat, US dollar falls but so does Aussie - ASX futures unchanged

Jobless claims in the US came in a little lighter than expected last night, although this positive economic news didn't impact markets much and despite it being a small part of the Fed's equation on interest rate timing, the US dollar continued to drop. Some soft corporate earnings in the US dragged markets down there on some otherwise positive--but admittedly superficial--dynamics, being that the US dollar is backing off in chorus with interest rate hike expectations. While lower-for-longer rates in the US don't say anything good about the economy there, they will continue to be supportive of equity markets given the low expectations of returns elsewhere in cash and bond markets. In Australia, we are actually seeing a pick-up in rate-cut expectations once again - and this also is supportive of equity markets. The difference here has been that traders are beginning to feel that, irrespective of a cut to 2.00% rates in Australia, that banking credit reforms with regard to home loans are going to be strongly on the agenda given the RBA's inability to cut rates and isolate housing booms at the same time. This is causing a sell-off in the banks.

The tick-up in RBA rate cut expectations has caused interbank cash rate futures to sell off, dragging the Australian dollar down with it. Unusually, as illustrated in today's second chart, the US dollar index (orange line) traded in the same direction as the AUDUSD currency pair (black line). Logically, when the US dollar sells off the Aussie usually strengthens; however, it seems that rate-expectations are changing once again and FX traders have decided to bring their focus back to the negative effect that a 25 basis point cut to 2.00% rates would have on the Aussie.

In today's first chart, I've plotted WTI crude oil (OILUS), which is breaking a little higher than it was during the second half of April. The headlines are reporting large foreign reserve expenditure by Saudi Arabia, which is occurring due to the gap in government revenues and expenses, caused by lower oil prices. Saudi Arabia is quite famous for throwing money at the public to quell the potential for civil unrest. Youth unemployment is a big problem in Saudi Arabia, and the under 30s make up a staggering two thirds of the population there. As youth enter the workforce and hit frustration due to competition for jobs, social unrest rears its head and the only way to diffuse this is to create unnecessary public sector jobs or increase welfare options. This is a very expensive exercise and--should this story gain more traction--speculators will likely stay on the long side of oil trades in the hope that the Saudis will happily allow prices to rise a little more in order to help fund spending.

Today‚Äôs charts are taken from the Rivkin Trader platform. 30,000 global instruments available to trade including FX, commodities, index, ETFs and international shares. Trade Australian share CFDs from just $8 or 0.10%. Click here or phone 1300 748 546 to open a Rivkin Trader account now.

Upcoming economic announcements: Japanese CPI along with a raft of other Japanese data out at 9:30am, Chinese PMI out at 11am, US ISM manufacturing survey at 12am, all Sydney time.

This article was written by Scott Schuberg, CEO of Rivkin Securities Pty Ltd. Enquiries can be made via or by phoning +612 8302 3600.

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