Jump to content

Pull back - APAC brief 28 Dec

Sign in to follow this  
MaxIG

Written by Kyle Rodda - IG Australia

A pull-back amid interesting activity: Markets received their slingshot higher and continue to swing about in both directions. That’s the key takeaway from last night’s trade; of course, that’s all too general, though – akin to explaining a rally in the market to their being more buyers-than-sellers. Yes, it’s self-evidently true, however it does little to answer the question of “why?”. Overall, market activity in the last 24-hours has provided a much greater and more nuance picture than what we got from the one-way rally in US markets on Boxing Day. There are now burgeoning answers to some of the questions traders have been asking; like any complex phenomenon though, the answers only lead to more questions. As a trader, this is daunting, but reason for excitement: risk is everywhere, so volatility is higher – but opportunities abound.

1.jpg

The real versus paper economy: It could be a far too grand a notion: the push and pull in financial markets at present is being driven by confusion regarding the current relationship between the “paper (or financial) economy”, and the “real economy”. The fact that such a distinction exists feels absurd. Shouldn’t proper functioning financial markets be the vessel to allocate capital efficiently throughout a (“real”) economy? In principle, that ought to be so. In this world, that axiom seems far from true. The battle being waged within markets at present – and this unfolded in a significant way overnight – is between economic policy makers (a la the US Federal Reserve) on one hand, and financial market participants on the other: the former says things are alright, while the latter is indicating everywhere that things are not okay.

End of the cycle? It’s an obscure and distorted world, when it comes to the global economy and how it interacts with financial markets. It’s not necessarily the prevailing view, nor is it absolutely the truth, but times like these when there is such utter confusion in the financial world, it lends itself to the idea that markets have become dislocated from the economies they supposedly serve. Financial cycles (the concept goes) aren’t being driven by economic fundamentals. Instead, they are fuelled via credit cycles that drag real economic growth along with asset bubbles. (Ray Dalio recently discussed the matter in an article certainly worth “Googling”). In such a world, economic relations don’t dictate financial market behaviour, but the other way around – and, unfortunately, as an aside: to the benefit of a very few.

The Fed’s part to play: Who to blame for that? It’s systemic, and structural and probably founded on some false-ideology. One big part of this system of thought however goes back to this “paper economy” and “real economy” binary. Analysing the rise of the term “real economy” and its usage over time, a spike in the phrase occurred around the early-1980s, around about the time the neo-liberal revolution and subsequent global financialization process began. Since then, policy makers (again, a la the US Federal Reserve) have rationalized away the emergence of massive, credit fuelled asset bubbles, seemingly exacerbating the already unstable underpinnings of the boom-and-bust cycle. That is: the booms and busts have become bigger as the response to each necessitates even more aggressive policy (i.e. monetary policy intervention) to keep the process going.

2.jpg3.JPG

4.jpg

Risk-off, anti-growth: This is all very abstract, to be sure. However, it is relevant in the context of last night and today’s trade because of the price action we’ve been handed. First-off, of course, the sell-off on Wall Street continued after the day prior’s historic rally. In saying this, the major Wall Street indices have rallied into the close, on lifted volumes, to add weight to the notion US equities have met their bottom. The real fascination ought to be directed to what has again happened in interest rate and bond markets overnight. Rates and yields have tumbled once more: interest rate traders have reduced their expectations of hikes from the US Fed to a measly 5 points in 2019 (at time of writing), while the yield on the US 2 and 10 Year notes has fallen by 4 basis points each.

Soft US data: It reeks of the trouble markets find themselves in. The pull back in stocks had been on the cards all day, with US futures pricing that in throughout mixed Asian and European trade. The major driver of sentiment overnight though was the US consumer confidence print, which revealed consumer sentiment plunged last month. It piques concerns that the engine of the US economy – the almighty consumer – is sensing tough times ahead. Forget that the labour market is strong, and consumption has been hitherto solid, the everyday US punter thinks next year will provide them with less than what they have received in the recent past. It’s given the perma-bears the vindication they sought, who’ve once again wagged their finger at the Fed for being so naïve as to think the US economy could prosper without accommodative monetary policy.

Australia macro and day ahead: Fortunately for Australian markets, we’ve not been forced to deal with such a struggle between markets and policy makers. We’ve yet to resort to extreme monetary policy measures to support our economy, and we’ve a simpler economic structure: at its core, if global (read: Chinese) growth prospers, so do we. There are risks there that may mean our economy will face headwinds in 2019, mostly in the form of the trade war. Tighter financial conditions will filter through to our markets, as well. Given the weightiness of the banks and miners in the ASX200, these variables pose reasonable downside risk for our market next year.

So: today will be risk-off, in line with the lead passed to us from bearish traders in Europe and North America. Hence, SPI futures are indicating a 73-point drop at the open for the ASX200, on the back of a volume-light, but broad-based 1.88 per cent rally on the index yesterday. The market closed just below the significant 5600 level during yesterday’s trade – above which a cluster of resistance levels exists up towards 5630. The anti-risk, anti-growth feel to overnight trade has also harmed the Australian Dollar, which despite a sell-off in the USD, is testing support at around 0.7020, and eyes a break below the key psychological barrier at 0.7000.

5.jpg

  • Like 1
Sign in to follow this  


0 Comments

Recommended Comments

There are no comments to display.

Join the conversation

You can post now and register later. If you have an account, sign in now to post with your account.
Note: Your post will require moderator approval before it will be visible.

Guest
You are posting 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
      3
    • Total Entries
      437
  • Our picks

    • APAC brief 20 Mar
      Another trade-war headline downs sentiment: There’s some news floating through the wires that sentiment has taken a hit overnight courtesy of some unfavourable trade-war headlines. It’s been reported that Chinese officials aren’t co-operating with their US counterparts, as it applies to certain sensitive elements of trade-negotiations. The S&P500, which had been developing some intraday momentum prior to the release, has retraced throughout trade, consequent to the news. It’s closed flat for the day, but despite this fall, moves in rates and bond markets suggest the fundamentals currently remain the same. The all-important balance between financial conditions and growth expectations is still there, ultimately supporting the bullishly inclined, as markets now prepare for tomorrow morning’s meeting of the US Federal Reserve.


      The unresolvable issues: It’s perhaps an assumption alone, but the (very vague) report leaked to the market about trade negotiations surely pertains to one of the well-understood, seemingly intractable issues embroiling the US and China. Those, at its core, unrelated to economics, but to strategic, and somewhat philosophical differences. These are intellectual property theft, currency manipulation, and Chinese military posturing in the Asian region – especially the South China Sea. These differences are relevant because they boil down to brutal power-politics, and an essential clash of ideologies. This isn’t to suggest a trade-deal, and future bilateral cooperation can’t exist between both parties; but that whatever deal is struck, it’s unlikely to put an end to geopolitical tensions.
      • 0 replies
    • Debenhams / Mike Ashley
      Join the discussion: "It seems likely to me that what will actually happen here is that Mike Ashley will bid, because aside from anything else, the House of Fraser is not of critical size without combining with Debenhams and is losing money heavily.

      As Mr Ashley does not have access to enough luxury brands, so he is having to fill the House of Fraser stores with Sports Direct stock which is badly weakening the House of Fraser brand. He needs to combine Debenhams with the House of Fraser fairly urgently I would say, especially now that Debenhams has signed off the Li + Fung deal which promises a pipeline of decent quality items into its stores."
        • Like
      • 3 replies
    • Dividend Adjustments 18 Mar - 25 Mar
      Please see the expected dividend adjustment figures for a number of our major indices for the week commencing 18 Mar 2019. If you have any queries or questions on this please let us know in the comments section below. For further information regarding dividend adjustments, and how they affect  your positions, please take a look at the video.
      • 0 replies
  • Latest Forum Topics

×
×