Stocks opened very strong in the US session following gains in Asia and Europe, which extended the sense of risk appetite in financial markets and helped to boost risk-on trades.
The main impetus for the rise was strong Chinese economic data as well as some other bright signs from Asia. First, we had confirmation that Chinese exports had a near 50% rise in exports. That means that global trade has not been harmed by the Euro-zone sovereign debt crisis. Also, China suggested that it would invest in Greece, boosting confidence in the country that started the escalation of the crisis. Adding to the positive trade data from China was a strong employment report from Australia.
The Australian economy added 26.9K jobs in May, higher than expectations of a 20.1K climb. There have been 283.6K jobs created since August as the Australian mining sector continues to see strong demand for its natural resources including iron ore and coal. The positive news will increase speculation about the timing of the next RBA interest rate increase. While the economy continues to add jobs, we did see evidence that the interest rate increases have filtered down into lower amounts of home loans and lower consumer confidence.
The Australian Dollar rose from a low overnight of 0.8260 to test the area at 0.8470, a 200-pip swing.
Across the water from Australia, the New Zealand central bank hiked rates by a quarter point to 2.75%, its first increase since slashing rates at the onset of the financial crisis in 2008. The Bank of Canada also increased its benchmark rate from 0.25% to 0.5%.
Despite some softer than expected trade data from Canada the USD/CAD pair moved below its support from yesterday low near 1.0365 to probe a new 5-week low at the 1.0285 level as of 10:15 AM ET.
In two central bank decision this morning, both the Bank of England and the ECB held rates at 0.5% and 1% respectively. In his remarks following the announcement Trichet said that rates are appropriate, meaning he sees no need to cut borrowing costs, while he defended the role the ECB is playing as it buys up government bonds from troubles euro-zone nations. Trichet said that the money markets were not functioning properly and the ECB had to step in. Critics have said that that move amounted to bailing out indebted governments and could fuel inflation, two key tenets of the central banks mission. In Trichet's defense the ECB was the only institution that could help stop the escalating crisis as it will take time to get the Stabilization Package of nearly $450 billion online. That way government's having trouble in the money markets could turn to that lending facility. Trichet stressed that the extraordinary measures taken by the ECB are temporary.
The Euro, riding first the wave of risk appetite overnight, rallied from its low near 1.1960 and extended its gains in the wake of Trichet's comments and the open of NY stock markets.
In the US, trade and jobs data came in on the weak side. The trade deficit for April widened to its highest level in more than a year as both exports and imports declined. The trade gap grew by 0.6% to $40.3 billion. On the jobs front, weekly jobless claims came in higher than expected. There were 456k new claims for the week ended June 4th when expectations were for a drop to 447K. Still that was an improvement over the previous week and showed that the labor market had firmed a bit.
Risk appetite was not to be deterred as US equitites opened with very strong gains, with the Dow Jones up more than 200 points in early NY trading. Investors and traders, not seeing any new bad developmetns from Europe, and positive data from Asia, bought into this week's risk rally.