Written by Kyle Rodda - IG Australia
Market sentiment: The final session of the week is upon us, and though a Friday can throw-up any number of shock events, the week has been a relatively good one for equity market bulls. Of course, this is primarily being led by a stable equity market in the US, but that strength has filtered through global equities to generate positive activity. Naturally, the ASX200 has benefitted from this dynamic, delivering an opportunity of circa 215 points for traders, based off last week’s lows. The risks to markets are still very elevated, but a dip in volatility below a 20 reading on the VIX has investors calmer than they were this time last week. Choppy trade and violent turns in sentiment could arise at any moment, and there is still some way to go to convincingly reverse October’s ugly sell-off. However, for the many who prefer to look on the bright side of life, signs of a turnaround are here.
Overnight: SPI futures are presently indicating a very modest 3-point dip for the ASX200, on the back of an overnight session where risk appetite was high. Sentiment was boosted by positive Tweets (a statesman like medium for political discourse nowadays, of course) from US President Donald Trump relating to the US-China trade war. The news, coupled with weaker than forecast ISM Manufacturing data, led the USD to abandon its bid higher, pushing the EUR above 1.14 and the Aussie Dollar above 0.7200, as the yield on US 10 Year Treasuries slipped to 3.14 per cent. The strong sentiment was boosted by solid US earnings, building upon the cheer engendered by news in the Asian session that China plans to ramp up its economic stimulus efforts. While fears of a spike in oil prices waned once more, on news that OPEC output climbed by the most since 2016.
European trade: Winding back the clock marginally further, European markets registered a more tepid day of trading. The DAX was up 0.18 percent while the FTSE finished a sliver higher than flat. Corporate news was lighter relative to the US, but the calendar was filled by numerous economic data and macro events. The biggest was the meeting of the Bank of England, who kept rates on hold and flagged that despite their rosy view on the British economy, their monetary policy settings will probably remain still for the near future. Irrespective, the pound continued to climb, aided by the weaker USD, but primarily on the basis that a Brexit deal will soon eventuate. European trade establishes a significant set-up for its final day of trade, ahead of a slew of PMI prints across the continent.
ASX200 Yesterday: Reflecting upon yesterday's session for the Australian shares, the modest 0.2 per cent gain belies some of the significant stories moving the market. Trade Balance was gang busters, showing a trade surplus of over $3.0b, courtesy of a climb in iron ore prices generated by the recent round of Chinese economic stimulus. The miners naturally benefitted from the results, which added to already strong daily gains thanks to the announcement of a special dividend and share buyback from BHP. Even in light of the strong day for the materials space, it was the continued swings in the banks that truly dictated trade, after NAB posted results that were judged to not quite as bad as expected. The NAB closed the day higher as a result but was the only of the Big 4 to do so, as investors balance the positive news of signs of successful restructures by the banks, against the broader challenges of slowing credit growth and a cooling property market.
US tech: A play into big-tech is what is leading Wall Street higher – a conspicuous risk given the tone of the recent market correction. The NASDAQ is the biggest winner of the three oft-watched US equity indices, registering gains of over 1 per cent. It would appear investors see a level of value in the US technology giants, even considering their proven vulnerability to shifts in interest rates expectations. It’s always a risk to bundle every US-tech company together and assume their fortunes are eternally correlated. The internet monoliths, Facebook and Twitter, deliver a vastly different value proposition than that of a Microsoft, Amazon or Apple – the latter whose earnings generally disappointed this morning. News on any one of the tech giants becomes of relevance to the index trader, but for the value-searcher, separating the substantial fundamentals from the fluff is a necessity.
US equity market risks: The reasoning behind highlighting the (for many) well-worn distinction between the big tech stocks is that, on balance, risk is skewed to the downside across that industry. The US tech industry remains bolstered by money following momentum and flow in the pursuit of the next market unicorn. It’s what in large part keeps the market running higher despite a mix of valuations and tepid market fundamentals. The mega-cap staples in the US technology space can’t be ignored, and as market participants digest Apple results, it should be reminded that the biggest of these companies still appear investor essentials for many. Nevertheless, when reviewing the depth of the NASDAQ and its influence on US equity market strength, lowly dividend yields and relatively stretched valuations mean the performance of US indices overall are very liable to the sort of shocks witness in October.
US Non-Farm Payrolls: The bounce in equities this week in mind, tonight's US Non-Farm Payrolls is of tremendous significance. Once again -- and as has been so for years -- the key number in tonight's release is the wage growth component, which is forecast to reveal annualised wages growth of over 3 per cent. If realised, it will prove a testament to the roaring power of the current US economy, already posting growth of 3.5 percent and unemployment at 3.7 per cent. Though for Main Street this is a refutably a good thing, a wage growth figure at forecast or above will be un-welcomed by investors, who will need to promptly re-reprice the higher likelihood of an aggressive Fed. This week's play into US equities has been underpinned by a significant drop in bond yields. If markets are forced to factor in an aggressive Fed once more, a replay of October's marked sell-off may return to equity markets.