Jump to content

Main market drivers - APAC brief - 26 Nov

Sign in to follow this  

Written by Kyle Rodda - IG Australia

The themes: Boy oh boy, are we facing a significant week. It promises to be a big one, with so many of the pressing macro-economic issues currently driving market activity set to dominate headlines. Given this is so, and the Thanksgiving hangover kept trade light on Friday, casting an eye ahead and speculating on what the next seven days may deliver the most valuable insights. The themes won’t be foreign to traders: we’ve got the US Federal Reserve and global interest rates, slower global growth, the US-China trade war, Brexit, and the crash in oil prices. The way each unfolds sets the foundations for markets not only in the crucial month of December, but also the start of 2019. Being so, it’s more than likely that whatever the developments in these stories, traders will be perusing the devils in the detail to infer as much they can from them, providing ample fuel for heightened and ongoing volatility.

The Fed and US rates: The US Federal Reserve remains the major and most powerful driver of financial market activity. The impact of the end of the easy money era is manifesting in markets the world over. The question has long been asked – for the most part of the last decade, in fact – what the effects will be of normalizing Fed policy. We are apparently beginning to get that answer. This Friday welcomes the release of FOMC Monetary Policy Minutes, and the core concern for traders is whether the Fed is showing further signs of burgeoning dovishness. Traders have interpreted the central bank’s recent discourse as reflecting a reduced willingness to keep to an aggressive rate hiking path, amid concerns that growth and inflation (the later a data-point that market participants will also receive this week) has possibly topped-out. It’s resulted in markets pricing-in a 73 per cent chance of a rate hike from the Fed in December; and pricing out all but one hike from the Fed in 2019.


Global growth: The primary reason for this changing dynamic is there is a prevailing fear that the world is headed for slower economic growth. It’s far from assured, and with a remarkably strong labour markets coupled with still reasonable business conditions, the US remains in good stead to grow at a respectable clip. But the problem remains the world ex-United States, as forecasts increasingly point to a significant (enough) slow-down is Europe and China. This view betrayed itself on Friday in global bond markets: the yield on 10 Year US Treasuries fall precariously near the 3.00 per cent level, in tandem with yields across Asian and Europe – meaning the US Dollar held its bid. Perhaps of greatest concern is that this lift in bond prices hasn’t seemed to shift sentiment within equity markets, as a continued blow-out in the spreads on investment grade and high-yield credit aggravates concerns about over leveraged US corporates.



US-China Trade War: Fears about slower economic growth, the global debt burden and tighter financial conditions will be hard to unwind. The once high-flying US stock market has seen the Dow Jones, S&P500 and NASDAQ shed 5.8 per cent, 8.4 per cent, and 12.67 per cent, respectively, over the past 3 months. The losses will prove difficult to staunch, and momentum still appears skewed to the downside. If there is any hope of sentiment shifting-around this week, one imagines it’ll have to come because of improved relations between the US and China – and a possible beginning of trade negotiations. Overall, the signs are looking positive. US President Trump is mercurial, and the Chinese are stubborn, so the situation is liable to rapidly change. However, so far, the dialogue has been relatively amiable, inspiring hope that the beginning of the end of this trade war could well commence at the weekend’s G20 summit.

Brexit: The other geopolitical risk hanging over markets is of course that of Brexit. The UK’s and the European Union’s divorce deal will face another flashpoint this week, after almost being derailed over the weekend by Spanish official’s concerns around the Brexit-implications of Gibraltar. The deal has been rubber stamped by European bureaucrats at the weekend’s EU Economic summit, however the view remains that it won’t get through the House of Commons. A vote on the deal won’t be immediately forthcoming, and the official exit date for the UK isn’t until March 29 next year. But markets require far less-meaningful milestones to cast their judgement and get a feel of the likely fate of Brexit. The key-current Brexit agitators, like Boris Johnson and Dominic Raab, not to mention opposition leader Jeremy Corbyn, will surely whip up the rhetoric this week – reminding that this Brexit deal is possibly dead in the water, spelling trouble for European equities and the Pound.

Oil: Commodities are suffering owing to fears about global growth and widespread market-volatility, and this of course is no truer than in oil markets at present. The price of oil tumbled again over the weekend: WTI is trading just above the $US50.00 per barrel level at $50.41, while Brent Crude has spilled through $60.00 to presently trade at $59.32. There is waning optimism amongst oil-bulls that productions cuts can be organized by the world’s largest oil exporters, with the Saudi’s losing control of OPEC, the Russians showing only a tepid determination to intervene in markets, and the US advocating for lower oil prices. It’s a set of circumstances that seems very nearly intractable and will weigh on equities and credit markets – especially one that could very quickly spiral out of control if the massive number of long positions are unwound in the market.


ASX200: SPI Futures in the day ahead are indicating a 37 per point drop following Wall Street ‘s soft trade on Friday.  It’s difficult to imagine that the ASX200 will break its strong relationship with activity on Wall Street this week. Trading come the local session on Tuesday will be back to normal, after several days of thin trade: volumes on Friday were around 30 per cent below average. There isn’t a great deal of local data this week, either: Private Capital Expenditure data plus a speech from RBA Governor Philip Lowe is all we’ve got.

The strength of the bounce for the ASX200 will surely be tested this week, particularly if any one of the litany of macro risk factors causes a spike in volatility.  Much of the buying that has driven the bounce are in the markets safer and larger-cap stocks, implying that an appetite for risk is low, and the buyers are searching out bargains. The next key level of support to keep an eye on to gauge the underline strength in the ASX200’s mini-rally is around 5745, though it must be stated levels well beyond that need to be attained before a definitive turnaround in this market can be called.


Sign in to follow this  


Recommended Comments

There are no comments to display.

Your content will need to be approved by a moderator

You are commenting as a guest. If you have an account, please sign in.
Add a comment...

×   Pasted as rich text.   Paste as plain text instead

  Only 75 emoji are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.

  • Blog Statistics

    • Total Blogs
    • Total Entries
  • Our picks

    • Theresa May survives, Second Canadian diplomat apprehended in China - EMEA Brief 13 Dec
      Prime Minister Theresa May won a vote of no confidence in her leadership of the Conservative party last night. The results showed that Mrs May won the vote by 200 to 117, securing 63% of the total votes, she is now immune from any further vote's of no confidence for a year.
      • 0 replies
    • What’s making headlines - APAC brief 13 Dec
      What’s making headlines: There’s an hour and a half to go in the US session and global equities are up. Let’s assume they finish that way – there is plenty of room for clarification (and rationalization) late-on, if need be. Traders have taken the new green shoots in the trade-war and spun them into a positive narrative. Sure, the old green shots lay trampled below the new ones, but perhaps this time around the positivity will be given a chance to thrive. The other story hogging headlines in the financial press is the vote motion UK Prime Minister May’s leadership of the Tories. Market confidence has been shaken by that development, but as we wake-up this morning, the balance of opinion seems to be suggesting that May will win the day.

      The data side-show: Politics is driving markets still, which is always dangerous – it’s often a distortionary influence on prices rather than a revealer of fundamental facts. However, the fundamental economic data that was handed to traders overnight supported their optimism. Arguably the most significant release for the week, US CPI figures delivered a bang-on forecast number. If you’re a bull, locked in an environment where there exists fear of a global economic slowdown on one side, and fears about higher global interest rates on the other, a moderate outcome to any data-release is welcomed. Fundamental data last night was light otherwise, with US crude oil inventories the next most important release. It overshot forecasts, but still showed shrinking supplies, which boosted oil prices and (at the very least) didn’t detract from the bullish sentiment.
      • 0 replies
    • China to cut US car tariffs from 40% to 15%- EMEA Brief 12 Dec
      Asia stocks were higher Wednesday morning; Nikkei 225 rising over 2%, ASX 200 up by 1.25% and Hang Seng Index around 1.36%. This was followed by the news of China to cut US car tariffs from the planned 40% to 15%, the same tax charge on car imports from other countries
      • 2 replies
  • Latest Forum Topics