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A bullish Monday - APAC brief 2 Dec

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MaxIG

Written by Kyle Rodda - IG Australia

A bullish Monday: That big uplift we were all expecting after the weekend’s events at the G20 has transpired. The trade-war truce, as fleeting as it may prove to be, has supported a substantial enough boost in sentiment. Risk appetite has been teased, and risk assets across the global, beginning in the Asian session yesterday, and carrying through European and North American trade, have dutifully rallied, consequently. It’s a synchronized boost, prevailing across asset-classes, with traders relishing the double-shot of bullishness injected into markets in the last 7 days: a much more dovish Fed, which has lowered the possibility of higher global interest rates; and a de-escalation of the trade-war, which has ameliorated the concerns regarding future global economic growth.

Global stocks: There remains, at time of writing, a few moments left in the North American session, and as it stands, the good-vibrations are waning somewhat. Nevertheless, Wall Street is higher, capping-off a positive day for markets overall. The NASDAQ is leading the charge, up around 1 per cent for the session, while the Dow Jones and S&P500 are 0.7 per cent higher for the day. It follows an Asian and European session which saw the Nikkei up 1 per cent, the CSI300 up 2.8 per cent, the DAX up 1.85 per cent, and the FTSE100 up 1.2 per cent. Volumes have also been very substantial, running 30 per cent above average on the S&P, and a remarkable 45 per cent above average in Chinese share markets, adding conviction behind the day’s trade.

Currencies and commodities: Across the currency and commodity landscape, a comparable appetite for risk has occurred. Growth proxy currencies have generally prospered: the Australian Dollar is (presently) trading at 0.7350 – having challenged the 0.7390-mark yesterday, before a raft of soft local data gut-checked the local unit – and the New Zealand Dollar is up around 0.6920. The Loonie is also rallying, benefitting from the additional support of higher oil prices. The US Dollar has been sold-off, along with other haven currencies like the Japanese Yen, pushing the price of gold to resistance at $US1232. The Euro is modestly higher courtesy of a weaker greenback, but the Pound has left the party following news that a vote of no-confidence looms for Prime Minister May in the British parliament. Finally, Industrial metals are higher, thanks to the uplift in economic-growth-optimism, paced by LME copper, which rallied 1.6 per cent.

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Can it last? So that was Monday, and its undoubtedly been a day of positive price-action. But it now begs the question: beyond a sweet one-day rally, does this move higher have more legs? As far as this week goes, the matter is dubious. Markets move on surprises, whether they be good or bad, and what market participants received on the weekend was quite a surprise: a cordial outcome to the trade-talks was expected and priced-in; what wasn’t, however, was the freezing of tariffs for 90-days, coupled with the various commitments to reform certain trade practices. The rush-of-blood for traders came as they attempted to price this new information into markets – naturally, leading to a spike higher in risk-assets. The problem is now that with today’s market activity this has been completed, meaning traders will now go back to looking ahead to the next events at hand.

Risk events loom: Looking forward into just this week alone, there is an abundance of information to keep traders shuffling on their toes. Economic data wasn’t particularly heavy across the globe yesterday, but the next 24 hours will set in motion a fortnight of highly significant economic data. Locally, the RBA meets today, before the big-ticket Australian GDP print is released tomorrow. A slew of PMI figures will be released in the next four days across Asia, Europe and North America, and will provide a proper gauge on the state of global growth. US Non-Farm’s come out on Friday, potentially reshaping once more perceptions regarding the US inflation outlook and possible Fed policy. And OPEC meet on Thursday (AEDT) to discuss oil markets – an event which has taken even greater significance now after Qatar announced yesterday it plans to leave OPEC.

Bonds flashing warning signs: Those are just the headline grabbers, too. There’s considerably more than just that going on. Fundamentally, from a macro-perspective, a reversal in sentiment if a data-point goes the wrong way for the bulls could shift the dial once more. The signs under-the-hood are already presenting this: despite rallying across the curve briefly during Asian trade, US bond yields have retraced their gains –  the yield on benchmark US 10 Year note climbed to 3.05 per cent, before plunging back below 3.00 per cent in US trade. Most worryingly, the spread between the 10 Year and 2 Year US Treasury notes narrowed to just below 16 points, while the spread between the 3 Year and 5 Year equivalent has inverted. This is as good as a flashing light as any to suggest that markets are increasingly pricing in slower growth, if not some sort of US recession, moving into the medium-to-long term.

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The here and now: ASX200: That’s certainly the alarmist view – and it should be noted that it’s a problem to be confronted in the slightly-more distant future. Bringing the focus back to the here-and-now and to today’s Australian session, SPI futures are pointing to a pull-back in the ASX200 of about 20 points. The day’s trade will be highlighted by the RBA’s meeting, but the central bank will keep interest rates on hold, and there are few surprises tipped to come out of the accompanying statement. Yesterday’s session, during which breadth was a remarkable 88 per cent, could be considered a combination of a recovery from Friday’s substantial losses, and a relief rally off the back of the weekend’s G20 meeting. Maybe futures markets are telling us a necessary moderation of that excitement ought to be in store today.

It was the materials space that unsurprisingly led the charge during yesterday’s trade, supported by a climb in the financials sector. The former added 29 points to the index and the latter added 16. Energy stocks were the best performing in relative terms, as traders took the cues from Russian and Saudi leaders at the G20 regarding likely oil production cuts, to climb 4.6 per cent and tip-in 14 points to the ASX200’s overall gains. Riskier momentum/growth stocks in the health care and information technology sectors experienced a solid bid – a healthy barometer of bullishness. Ultimately, across the overall index, though it may not transpire today given early indicators, a rally beyond support at 5745 towards 5786 is required to maintain a bullish-hue for the ASX200 coming into the Christmas period, to open-up a run at the more meaningful resistance level around 5875. 

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