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Westpac Institutional Bank Morning Report

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Westpac Institutional Bank Morning Report

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Europe again. Risk markets tumbled amid concerns the Greek financial crisis is spreading to Spain and Portugal.

The NY press inflamed the rumours, writing of those governments' reckless spending and banking system problems, and the Spanish PM was forced to comment that bailout speculation is "complete madness", as was the IMF ("there's no truth to rumours about Spain").

The 10yr government bond yields of Greece, Portugal and Spain rose 90bp, 34bp, and 7bp on the day, while the German yield fell 12bp. T

he Eurostoxx 50 closed 4.0% lower, with Athens down 6.7%. The S&P500 is currently 2.5% lower, and the VIX measure of risk aversion spiked to a post-February high. Commodities (CRB) are 2.3% lower, copper (-3.4%) and oil (-3.9%) badly hit, while gold (-0.9%) failed its safe-haven function, forming a bearish key day reversal.

A weaker private sector PMI report for China added to commodity weakness. US 10yr treasury bond yields fell 8bp on Europe, despite US factory orders and pending home sales beating expectations.

The US dollar index surged to a 12-month high of 83.33 (from 82.60 at the Sydney close). The EUR did the inverse, falling from 1.3175 to 1.2994. The yen outperformed, 95.00 to 94.33.

Commodity stronghold AUD underperformed the majors, falling from 0.9208 to 0.9085 in the wake of an RBA pointing to a pause in June, hawkish utterances from RBA-watchers McCrann and Mitchell swamped by the global gloom.

The NZD fared only slightly better, falling from 0.7280 to 0.7190. AUD/NZD made a post-February low of 1.2596.

US pending home sales rose 5.3% in Mar. That followed an 8.3% jump in February and reflects the combination of improved weather conditions and a last minute scramble to beat the now expired tax credit for home-buyers. Sales were especially strong in the south, up more than 20% in Feb-Mar, although there was some slippage in north-east sales. Housing data will remain supported by these factors for the next month or so but will likely soften later in Q2.

US factory goods orders rise 1.3% in Mar. This reflected an upward revision to the durables component (from -1.3% to -0.6%) and non-durables rose 2.9%, partly due to higher energy prices but volumes in various components were higher too. Factory orders have now posted seven consecutive monthly gains. Factory inventories rose 0.3%.

Weekly retail reports soft. Chain store sales posted their first fall in seven weeks, while the Redbook retail average slowed further to -2.2% in the last retail week of April.

Euroland PPI up 0.6% in March, lifting annual producer price gains to 0.9% yr, the first positive since late 2008. Meanwhile German retail sales fell 2.4% in March, the second steep fall in three months, though some back revisions were positive.

German official calls for "orderly insolvency" involving debt restructure for problem euro-member economies. These comments from floor leader Volker Kauder and others in the Merkel administration sent shivers into equity markets, not least because Germany will be the largest European contributor to the proposed EUR110bn Greek bailout.

UK household credit soft in March. Consumer and mortgage credit net outstandings both rose by just GBP0.3bn, partially reversing a recent uptrend in both lending categories. However new mortgage approvals edged up from 47k to 49k.

UK factory PMI jumps from 57.3 to 58.0 in April. The industrial sector was doing well at the start of Q2 according to this survey.

Outlook

AUD/USD and NZD/USD outlook next 24 hours: AUD-longs continue to bail, and support is now down at 0.9100. NZD has fallen back to its channel top around 0.7200, and it's crucial this holds, otherwise a fall back to the 0.7070-0.7130 region beckons.

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