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Friday’s trade: APAC brief - 31 Dec

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MaxIG

Written by Kyle Rodda - IG Australia

Friday’s trade: Activity in global markets was more settled on Friday. There isn’t a consensus yet whether the trading witnessed last week was a dead-cat bounce, or a true bottom. Nevertheless, perhaps the lack of substantial news flow was enough to keep the bulls and bears from clashing heads for one day. The ASX200 impressed the bullishly inclined, albeit once again on thin trade, to add 1 per cent during the Asian session. The index managed to chop through the cluster of resistance between 5600 and 5630, to end the week at 5654. The rest of the Asian region put in a mixed performance, with China’s market finishing 0.44 per cent higher and Japan’s Nikkei ending 0.31 per cent. Europe fared well, ending its week in a sea of green, while US indices were also mixed.

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Final day of 2018: Today is quite obviously the last trading day of 2018 and it caps off an extraordinary month – and an extraordinary year, at that. A reliance on the calendar as a way of defining and measuring market success is shallow. But for purely rhetorical purposes: who would have thought that a year that would contain two all-time highs for Wall Street would culminate in a negative year for global equities? In a similar vein: what about the gang buster earnings, and white-hot economic growth – does this seem like the end of a year that contained both those things? It’s reductive to distil the year’s market action to those two points, however it does highlight how unconventional and sometimes strange this year has been in global markets.

Volatility: The year was much about the return of volatility. Volatility is a measure of fear, and fear is a function of uncertainty. Uncertainty breeds confusion, and the behaviour in financial markets at present is reflecting a state of confusion. It stands to reason and doesn’t necessarily need to induce pessimism. A collective view on the state of the world is absent – good, bad or otherwise, the aggressive swings in equity markets last week is a function of market participants seeking to price-in the most accurate representation of the financial world right now. Such a representation is far from being fully formed, and its shape is being pushed and pulled by opposing ideas and views. Until the will of either the bulls or bears can overcome the other, swings in markets, in an environment of tightening financial conditions, will continues into 2019.

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Bulls, bears and the Fed: Fundamentally, there is a disagreement between the bears and the bulls about future global growth and financial conditions. On the one hand, the bulls suggest the sell-off is overdone, and prices have corrected approximately to where they ought to be. On the other hand, the bears are of the belief that this sell-off has more to run, and that prices remain distorted. The logic begins with the US Federal Reserve, and market views on what the Fed will and ought to do, then expands to the many other major issues impacting market sentiment from there. A great many think that the Fed is overestimating the strength of the US economy and will lean on it in such a way that it will exacerbate a looming economic slow-down – so much so that Fed hikes have been effectively priced out for next year.

Risk-off, anti-growth: It’s been over a week since the December 19 Fed meeting, and the central bank’s next meeting isn’t until January 31st, opening-up the chance of an uncertain and volatile month. In equities, beginning on Wall Street, the foundations of major turbulence are in place. Traders are bidding up safe-havens, and pricing out higher global interest rates, pushing the yield on US 10 Year Treasuries to 2.72 per cent, and the yield on US 2 Year Treasuries to 2.52 per cent. The US Dollar is looking exhausted as-a-result, falling to 96.40, supporting a push higher in gold, which rallied to $US1283 over the weekend. The anti-risk, ant-growth mentality of traders has also pushed the Yen deep into the 110-handle and held the AUD/USD to support at 0.7040.

Trade war: It’s very unlikely to change the trend or status quo, however today’s focus, at the outset, should be directed towards riskier, growth exposed assets. A mere Tweet of course, though confidence again has been piqued by assurances from US President Donald Trump over his Twitter account that there is being made “Big progress being made (on a trade deal)”. Markets are used to this commentary, so the chances of a complete overturn of the prevailing view on the trade war is next-to-zero. Even still, it adds to what appears to be positive momentum in working towards a trade-resolution, at a time where Chinese equity equities keep plumbing to new lows, and fears mount for the health of the Chinese economy and financial markets.

ASX200: As this all relates to the ASX200 today: the latest traded price in SPI Futures is implying a 22-point jump for the index today. The trend for the ASX200 is still lower, meaning market bulls should remain cautious. With its break through ~5630 on Friday though, the index apparently possesses some upside, even if for no longer than the short-term. The market is currently wrestling with the index’s 50-day EMA at 5669 – eyeing the psychological-barrier of 5700 presents as the next key level. Beyond that, a line-in-the-sand is draw at 5760: the level represents boundary line resistance, traced back to the index’s last high. Given that the fundamentals are yet to greatly shift, a break through this level seems unlikely. However, it might well indicate that at least for the ASX, the bears are losing control of the market.

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