Written by Kyle Rodda - IG Australia
The global market landscape: November’s gains, as modest as they were, have been snatched it would seem, across Wall Street indices and Australia’s ASX200. The bloodletting has been profuse once more this week, and it seems that diminishing number of momentum chasers have had handed to them another dose of market reality. To be fair, this latest round of selling has been precipitated by a new risk: tumbling oil prices. The price of the black stuff bounced overnight, but this was of course only after a considerable plunge that sent prices into a technical bear market. Energy stocks have been pummelled, and its sparked concerns that debt instruments secured to oil held by many corporates are at a materially higher risk of default. That’s turned a commodity problem into a real-financial problem.
US markets: That’s what has manifested in markets overnight. Credit spreads on US investment grade credit have blown out again, compounding the existing concerns relating to the effects Fed tightening will have on (deteriorating) liquidity conditions. The 3-month Libor rate for one, despite relatively lower volatility since the end of October, has continued to march higher, further stifling financial conditions. The assumed affect this dynamic will have on global credit availability has hit financial stocks, and those areas of the market considered highly leveraged – like US tech – driving a remarkably synchronized sell-off across Wall Street Indices last night. At time of writing, the Dow Jones, S&P500 and NASDAQ have pared losses for the session, leading into the final moments of trade, but this turnaround only occurred after an announcement by UK Prime Minister Theresa May she has cabinet support for her Brexit deal.
US Treasuries and US CPI: US Treasuries have caught a bid on last night’s trade, with the yield on the US 10 Year Treasury note falling to 3.10 per cent, and the yield on the US 2 Year Note falling to 2.85 per cent, narrowing the spread between those two assets to 25 basis points. A haven play into Treasuries was fortuitously supported by (on balance) softer CPI figures out of the US overnight: annualized core CPI dipped from a month earlier to 2.1 per cent. The figures momentarily dulled fears of inflation risk, permitting traders to discount such anxieties, as risk-off assets, such as US Treasuries, were sought. It’s a trade with shrinking efficacy, however, and it won’t be long before the new-normal of elevated volatility, caused by a hiking US Fed, snuffs it out.
Fed policy and Powell’s speech: This is because despite all the volatility already seen in financial markets in recent months, it won’t be enough to stop this Fed from hiking interest rates. Indeed, circumstances could change, and a risk too difficult for the Fed to ignore could derail these plans. As it stands now though, Jerome Powell’s Fed has little sympathy for the crocodile tears of market participants. He and his team are concerned with Main Street and its wellbeing, and for now, the average American punter (at least, according to the data) is doing rather well. Wall Street will just have to adjust to this world of less accommodative monetary policy – just as markets ought to do when they are functioning properly, and without artificial support. For this reason, the day ahead will find itself hinging-on a speech to be delivered by Chairperson Powell, with traders waiting for any word that may indicate a more dovish view.
Geo-political risks: There are genuine macro-risks currently, and although not as significant as the structural factors relating to US Fed policy, they have and will continue to drag on US and, as such, global growth. Ironically enough, even considering this week’s equity market plunge, the outlook for matters relating to Brexit and the US-China trade-war has probably improved. The so-called “all-level” talks between the US and China has been welcomed by investors, and as of early this morning, UK Prime Minister Theresa May has announced that she has secured cabinet support for her recently negotiated Brexit deal with the European Union. The warmer sentiment generated by both stories has led to a sell-off in the US Dollar in favour of the Pound and Euro, which are presently trading above 1.30 and 1.13 respectively; while the Australian Dollar has appreciated in line with offshore-yuan to trade at resistance around 0.7240.
ASX200 yesterday: SPI futures have picked up very slightly as Wall Street pares losses to end the North American session. The good-news (for markets, that is) story about Brexit and its progress has delivered the sugar hit necessary to boost trader confidence, during what has otherwise been a challenging week for the bulls. Yesterday’s trade for the ASX200 saw technical levels kicked aside, with much of market activity surely attributable to some irrational panic. Energy stocks suffered throughout the day, as did high-multiple-stocks in the health care sector, along with the heavy-weight banking stocks. The 1.74 per cent tumble really kicked-off around mid-day when Chinese money-supply and credit figures spooked market participants. Weak Chinese Retail Sales data seemed to weigh on Chinese equities, with the CSI 300 shedding another 1 per cent.
The day ahead: An already very broad-based sell-off – breadth ended at a narrow 15 per cent – accelerated by way of virtue of the weak Chinese data, leading to breaks of support at 5825, 5800 and 5785. Another day of plus-1 per cent losses is rather improbable today, especially given the positive Brexit news, and that employment data is the only major local release. The market isn’t demonstrably oversold yet, and momentum hasn’t crossed to a point where hastened selling should take place. Furthermore, though bright spots are hard to find, a small minority of bargain hunters are surely to be sniffing around for value after three successive days of declines. More generally, pressure remains to the downside in the medium term: 5690 should be watched for as the next key price-level, a breach of which could open-up downside to 5600, and see the local index return to the very sticky range it occupied for 6 months in 2017.