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First trading day of the new year - APAC brief 3 Jan

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MaxIG

Written by Kyle Rodda - IG Australia

First trading day of the new year: Traders picked-up right where they left-off in the first trading day of 2019. Hardly a true microcosm by any means, but the last 24 hours could be considered an appropriate metaphor for how analysts expect markets to behave in the year ahead. Dire warnings out of Asia about global growth, backed-up by lukewarm activity in Europe, finished by a wildly fluctuating Wall Street. Trading conditions haven’t totally returned to normal; activity was very low globally, especially in Asia. However, it is lifting slightly when compared to last week, as traders drag their feet back to their desks for another year. Volatility is retracing, to the delight of investors and perhaps the chagrin of (bearish) traders. The fundamentals haven’t shifted even if sentiment has, so let’s keep ourselves strapped in.

House prices falling: Taking in isolation what was hurled at Australian markets yesterday, and it was a bad day for the bulls. As alluded to, volume was light in Asia, and the ASX experienced volumes 45.85 per cent below the 30-day average. The financial press was handed two big headlines to run with that meant it was left-right-goodnight and straight to the canvas for the Aussie share markets on day-one of 2019. CoreLogic released its latest reading on the Australian residential property market, and for home owners it left much to be desired. The slow-down in the market continues for the major Sydney and Melbourne markets, each down now from their respective highs by 11.2 per cent and 7.2 per cent, according to yesterday’s reading.

China slowing: The ASX200 didn’t move a terrible amount on that release, though it was a drag throughout the day. The real gut-check came upon the release of Caixin PMI data out of China, which confirmed that Chinese manufacturing has dived into contraction territory. It’s the latest evidence that, owing to standard cyclical factors and the stifling impact of the trade war, the Chinese economy is decelerating in a significant way. Of course, where goes China so goes Australia, more-or-less, and the prospect of an industrial slow-down in the Middle Kingdom, combined with sentiment-sapping consequences of a domestic property collapse, piqued fears our economy is headed for some turbulent times ahead. Naturally, the financials and materials sectors were the big laggards on the ASX200 consequently, with index plunging 1.57 per cent for the day.

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Mining and property: It’s a great summary of the Australian economy, this statement: the Australian economy is founded on digging-up stuff out of the ground, selling it overseas, then blowing the income on residential housing. A bit crude, probably unsympathetic too, but quite pithy and somewhat true. Given it’s the case, a set of circumstances whereby Australian property and mining is facing headwinds is no good for the economy and no good for the ASX. As often appointed-out, for index watchers, half the ASX200 is comprised of materials and financials stocks. Problems for Chinese growth is a challenge for the former, and problems in domestic property is a challenge for the latter. When both problems emerge simultaneously, it’s a big problem for the economy and the share market.

RBA and the Australian Dollar: The most noteworthy result of yesterday’s difficult circumstances is that traders are pricing in cuts from the RBA this year in a bigger way. A survey of economists built the early consensus that Australian interest rates won’t be hiked until 2020. Traders, often far less forgiving, have in the space of a month already run from holding that view, to one where there is a roughly 30 per cent implied probability that the RBA will cut interest rates this year. Needless -to-say, the dynamic has legged the Australian Dollar: the little battler held up resiliently during Asian trade, bouncing off psychological support of 0.7000. But as we wake up this morning, the local currency has plumbed lows of 0.6982, taking it to its lowest level since February 2016.

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Growth concerns, safe-havens: It can’t be surprising that this is so; arguably its over-due, though one only ever admits that after the fact. Despite the bounce in global equities in certain geographies this past week, assets tied to fundamental growth prospects are still ailing. Last night’s swathe of Europe PMI figures, while not as poor as their Chinese counterparts, were still tepid, and did little to relieve investor anxiety. Copper was off slightly on this basis overnight, and amid continued institutional dysfunction in the White House, gold held above $US1280 as a safe-haven, despite looking a little overbought in the short-term. US Treasuries also caught a bid, as interest rate hikes from the US Fed this year become progressively priced out, with the yield on the US 10 Year note falling to as low as 2.64 per cent.

Wall Street and ASX Futures: There’s 30 minutes to go in Wall Street trade at time of writing and the benchmark S&P500 is lower by a small margin, and SPI futures are indicating a healthy 86-point bounce for the ASX200 this morning. After opening considerably lower, US stocks recovered and have traded within a 2.11 per cent intraday range. A boost in oil prices was the major catalyst, courtesy of some Saudi-data, revealing how important (and understated) the black stuff’s impact is on this market. Credit spreads are still flashing orange, but higher energy prices are keeping that contained. The trend is still to the downside for stocks, however the likelihood we are experiencing a bounce is higher: for the S&P500, a rally beyond 2600, and for the ASX200, a rally beyond 5800, would be a strong indicator that this is so.

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