Written by Kyle Rodda - IG Australia

The pattern continues: Wall Street indices have been swinging about madly again. The pattern continues: an open, a rally or fall, then a retracement or recovery. Today we’ve had an open, a rally, then retracement, then a recovery again. There were stories behind this price-action. Everything that happened overnight appeared perfectly explicable. One wonders though if the swings in trading activity are being overly attributed to headlines. Or perhaps it’s the case that higher volatility and sensitive nerves are leading to accentuated moves. Whatever the cause, fundamentally, the bears still have control of the equity market. There is a softer intensity to the selling on Wall Street this week. However, with the extremeness of last week’s moves having not been unwound yet, what we are seeing is sellers piling in on top of sellers, bit by bit.

ASX200: SPI futures have turned positive, after oscillating wildly during the overnight session. That contract is indicating a 17-point jump for the ASX200 at time of writing. Yesterday was a tepid but respectable day for Australian shares, managing to muster a 0.4 per cent gain for the day. Volume was slightly above the 100-day average and breadth was okay. Growth stocks led the charge, following US tech’s gains the night prior, with the health care sector up 1.7 per cent, courtesy of a strong bid for CSL and ResMed. The materials space was the biggest points score for the index, adding 8 to the overall index’s performance. The trend is still down for the ASX200, as it is with global equity indices presently. However, yesterday’s daily candle, combined with a bullish divergence on the RSI, suggests some buyers are re-entering the market in the short-term, potentially offering temporary upside to ~5700.

Headlines: Asia: Let’s look at the headlines in markets, to place what could be a mixed day for global equities into context – starting in Asia and following the turn of the globe. The Asian session was data-dry and lacking in the way of algo-shaking headlines. The resignation of India’s head central banker was meaningful but failed to move the dial outside of India’s markets. Australian business confidence was released and revealed softening sentiment in the sector. China released money supply data and that revealed stimulus from policy makers is filtering through the economy. Japan had a long-term bond auction that demonstrated how lower global yields is affecting appetite for government bonds. The major stock indices were up, in sympathy with Wall Street, except for the Nikkei, which was lower largely due to a stronger Yen.

Headlines: Europe: Europe handed more information to investors; and it was a very solid day for European equity markets. European Commission President Jean Claude Juncker poured water on any notion of refining the existing Brexit deal. He started that “There is no room for negotiation, but further clarifications are possible”. UK Prime Minister Theresa May met with German Chancellor Angela Merkel to discuss massaging the deal, only (in a comical display of cosmic irony) to become briefly locked inside in her German car at the doorstep of the meeting, before (figuratively speaking) being turned away by Chancellor Merkel. The fundamental data released in the UK was positive, though. The unemployment rate was shown to have held strong at 4.1% last month; and wage growth climbed by more than forecast to 3.3 per cent. 

Headlines: North America: The US is where all the news and therefore volatility is being made, and last night’s session delivered on that front again. The day’s outset was defined by news the Chinese are willing to lower auto-tariffs on US cars from 40, to 15 per cent. Industrials (auto makers in particular) rallied. Sentiment turned after a combative meeting between Nancy Pelosi, Chuck Schumer and US President Donald Trump raised the prospects of a government shut-down if funding for the President’s border wall wasn’t passed through congress. US Vice-President Mike Pence was there too, but he was busy pulling his I’ll-sit-silently-and -look-like-the-next-President face. Behind the reality T.V. show that is US politics, US economic data was solid, albeit ineffectual: US PPI beat estimates, but all eyes are on tonight’s US CPI data.

Snapshot of price (re)action: As of an hour to go in the US session, and with sentiment swinging back into the favour of the bulls again, the described news played out in prices like this. Risk appetite was generally higher. US Treasury yields ticked-up across the board: the US 10 Year note is yielding 2.86 per cent and the 2 Year note is yielding 2.77 per cent, narrowing the spread there to just below 10 points. As was implied earlier, the DAX and FTSE both rallied in European trade, by 1.5 and 1.3 per cent respectively. US credit spreads have narrowed. The US Dollar is flexing its muscles, rallying above 97.40 according to the DXY, as the EUR hangs onto the 1.13 handle and the Cable eyes a plunge below 1.25. Typical anti-risk assets, Gold and the Yen, are slightly lower, while the AUD holds onto 0.7200. And in commodities, copper, iron ore, and oil are higher on growth optimism.

Finding some meaning: Let’s finally try to put a ribbon on things. Going out on a limb: stocks look likely to close higher on Wall Street. So now for a few cursory takeaways from what’s been gathered from the start of the week. CPI tonight will colour this view, but traders are concerning themselves less with Fed-hikes and more with long term growth prospects. Activity in the yield curve last night probably attests to this. Rightly or wrongly, the trade-war is being judged the major threat to economic growth. Breakthroughs in this story last night injected the bullish sentiment into markets. The Huawei story is being ignored for now, which perhaps reveals that US and Chinese policy makers will bite their tongues just to get a deal done. These are good signs for bulls, but as is well understood, these things can turn very quickly.

The question worth considering is whether a de-escalating of the trade-war will do anything to arrest the global economic slow-down. The risk is, the damage is done; or perhaps even worse, there are even bigger forces at play stifling growth. The-trend-is-your-friend, as the cliché goes, and the trend is pointing to downward momentum in markets. Markets are a huge beast, and cycles move like turning ships. For now, the corrective and bearish price action across asset classes indicates the end of a cycle of some description. Until there are signs of definitive change – that is, a rebalancing from bearishness to bullishness – the matter for equity markets is this: is what we are seeing an uncomfortably but relatively benign retracement within the broad, post-GFC trend-channel; or are these signs that in 2019 and beyond, we are entering a true (perhaps recessionary) bear market?