Australian interest rates cut to record low

Asian stocks erased earlier gains and the Japanese yen rallied to a fresh eighteen-month high on Tuesday as investors grew doubtful about global central banks’ ability to boost growth through aggressive policy easing.

MSCI’s broadest index of Asia-Pacific shares outside Japan was flat after being up as much as 0.4 per cent on the day and is now trading at a three-week low.

"Markets are telling us is that the European Central Bank and the Bank of Japan are failing in their mission to expand monetary stimulus and that these policies are not doing what they are expected to do," said Cliff Tan, east Asia head of global markets research at Bank of Tokyo-Mitsubishi UFJ Ltd. "That is discouraging for equities"

The BOJ stunned markets last week by keeping monetary policy unchanged in the face of growing headwinds for its economy while the ECB has recently struck a more guarded stance on the question of adding more stimulus. Stock markets in Hong Kong and Taiwan led regional losers after a private survey showed activity at China’s factories shrinking for the 14th straight month in April as demand stagnated, forcing companies to shed jobs at a faster pace.

Australia’s central bank on Tuesday joined a growing line of central banks in adding more stimulus, cutting its cash rate to a record low of 1.75 per cent to head off deflationary risks. The majority of economists surveyed by Reuters had expected no change at the meeting.

Australia’s stock markets cheered the surprise rate cut with the benchmark index easily the outperformer in Asia and extending gains to be up more than 2 per cent on the day. The Australian dollar dropped sharply after the surprise rate cut with the currency falling below the 0.76 handle against the greenback from 0.77 earlier.

The dollar lost 0.3 per cent to 106.09 yen, and fell to as low as 106.05 yen at one point, its lowest level since October 2014. The yen added to its recent gains, having jumped about 5 percent against the dollar last week as the BOJ held off from expanding its monetary stimulus - the yen’s biggest weekly gain since 2008. The US Treasury put Japan on a new currency monitoring list with four other countries that have large trade surpluses with the United States, seen making it harder for Tokyo to intervene in the markets to stem the yen’s gains. The dollar index, which measures the dollar’s performance against a trade-weighted basket of its peers, is trading at its lowest since January 2015.

Crude oil futures edged lower after hitting 2016 highs on Friday as fears of a global supply glut eased. Oil futures rose to $45.10 a barrel in Asian trading, slightly below the 2016 high of $46.78 hit on Friday and 80 per cent above February’s low. Spot gold briefly rose above $1,300 an ounce in the previous session, its highest since January 2015, before edging lower on Tuesday. Rates markets were largely subdued with US ten year yields steady around 1.88 per cent.

Reuters