ASX yesterday: SPI futures are indicating a 5-point jump at the open for the ASX200, as traders continue to ride the wave of relief washing-over global markets. The boost in global commodity prices has underpinned the bounce in the ASX, with the materials and energy sectors leading the charge higher. Commodities markets maintained their run overnight, collectively climbing 0.76 per cent according to the Bloomberg Commodity Index, while the price of oil also threatened to challenge new highs, holding around the $US79 per barrel in Brent Crude terms. The dynamic reflects well the increased optimism around global growth since the anxiousness relating to the US-China trade war receded, translating consequently to a sharp pang of increased risk appetite for global investors.
ASX prospects: The curious point today however will be in the assessment of what ability the ASX200 has to push back toward decade long highs. Undoubtedly, the Australian share market has participated in the global bounce in risk appetite this week, but to a far lesser extent to other major global equity indices. This may well be because that although the ASX has pulled back some way from its recent decade long highs, it didn't suffer the same initial damage as other global indices did. The market is missing some of the drivers that fuelled the ASX200's rally, with the growth stock heavy healthcare space still lagging, and the lower Australian Dollar not attracting investors like it has (until lately) been.
Global equities: It means that there is the risk that the ASX200 is taking its turn at trailing behind the pack, especially if a firm lead from global indices can't be followed. European and North American markets built well upon the foundations established by Asian equities yesterday, particularly that set by the Nikkei, which challenged multi-month highs at 23,900. The FTSE and DAX added 0.4 per cent and 0.5 per cent during Europe's session, and the Dow Jones rallied 0.6 per cent during Wall Street's trade. Granted, the benchmark S&P500 only edged 0.1 per cent higher, weighed down by a pullback in the tech stocks that saw the NASDAQ lose 0.1 per cent, however both of those indices sit only modestly away from all-time highs.
China: The ingredient necessary to another breakout in global indices and the ASX200 may well hinge on sentiment regarding Chinese markets. Despite recovering considerable territory this week, adding to calls that China's indices have found a bottom, the overall trend for those markets remains in place. Using the CSI300 as the benchmark, yesterday's rally to 3312 places that index within touching distance of key resistance at 3400. Traders have opted to sell rallies on several occasions at that mark, reflecting doubts that Chinese equities are capable of a trend reversal in the short term. A breach and hold above that resistance line should be treated as a noteworthy shift in the view investors have on the Chinese market, and signal that broader global indices have scope to push higher.
Rates and bonds: A potential risk to the future strength of equities markets is the run higher in global interest rates. Even when the worst fears about the US-China trade war have prevailed over the last month, prices in international bond markets continued to slip, driven by the view that the US Federal Reserve can and will hike interest rates at the rate it desires. Interest rate traders have practically fully priced in an interest rate hike from the US Federal Reserve next week, with another hike in December priced at an 80 percent chance, and another 1 and a half priced in for 2019. The result has been a climb in US Treasury yields, with benchmark US 10 Year Treasuries now yielding about 3.07% - about 4 points shy of the yearly high.
Currencies: Of most concern to equity market bulls is that it appears this is a phenomenon no longer contained simply to the US: CPI data out of the U.K. last night showed a significant jump in inflation, printing at 2.7%, pushing up the likelihood of another rate hike from the Bank of England early next year. The Pound challenged levels above 1.32 after the release of UK CPI data, seemingly carrying the EUR with it, before both currencies retraced their gains, dragged down by lingering doubts about Brexit. The trade dynamic put more pressure on the US Dollar, dragging the USD Index through trendline support, and pushing up the price of gold back towards its resistance at $1207.
Australian Dollar: The weaker USD has aided a rally in the AUD, which, combined with Chinese Premier Li Keqiang’s comments yesterday that China would not look too weaponize the Yuan, has pushed the AUD/USD to around 0.7250 at time of writing. The Australian Dollar has been the trade-war risk proxy of choice for traders of late, naturally leading to a rally in the Aussie this week amid easing fears of an escalation in the spat between the US and China. It must be implored that the down trend is still intact for the AUD/USD and will likely remain so given the widening yield disadvantage between USD and AUD denominated assets. However, there is scope for a modest rally higher for the local unit to major resistance at 0.7310, a level that could come into the sights of traders if the NZD responds favourably to this morning’s New Zealand GDP print.
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