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Shift in preception - APAC brief 7 Jan

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A shift in perceptions: The fundamentals shifted on Friday. It wasn't a complete "180", but enough to change market sentiment in favour of the Bulls. The highly anticipated monthly Non-Farm Payrolls figure, along with US Federal Reserve Chair Jerome Powell's interview, delivered the goldilocks outcome market participants were craving. For those holding hope for financial markets and the global economy, the information gathered from each event soothed nerves that a major global economic slowdown is upon us. It's too early to make a solid call and form a trend from the circumstances, it must be noted – especially following the poor US ISM Manufacturing data and Apple's revenue downgrade. However, the news was enough to spark bullishness in traders, driving a rally into risk assets and out of safe havens to cap-off last week.

US Non-Farm Payrolls: The US Non-Farm Payrolls print was blistering, arguably revealing the best set of jobs figures out of the US for 2018. The jobs-added number smashed forecasts, printing at 312k for the month of December, above economist estimates of 179k. Previous month's figures were also revised higher, for a net gain of 58,000 in October and November. The unemployment rate did tick higher to 3.9 per cent from 3.7 per cent, but only on-the-back-of a climb in the participation rate, suggesting spare capacity exists even still in the tight US labour market. And most crucially, wage growth numbers revealed a climb in workers’ pay to 3.2 per cent on an annualised basis -- the best rate of growth roughly since the GFC.

A dovish Powell: The set of data could have been accused of being too hot, and a potential impetus for a hawkish Fed. The price action pointed to the contrary, perhaps courtesy of US Fed Chair Jerome Powell's interview on Friday night. Markets have been crying-out for attention from the Fed since October, around the time Chair Powell made his “a long way from neutral” comments. For those sympathetic to the view a central bank should be a back-stop for financial market volatility, Powell finally delivered the dovish stance markets had been calling-for. Perhaps taking a few pointers from his predecessors, and interlocutors for the night, Ben Bernanke and Janet Yellen, Powell assured the Fed is “listening carefully” to markets’ concerns and is “prepared with flexible policy”.

Risk-on: Markets had been pricing in a significant increase in the risk of recession last week, sending Wall Street shares tumbling, consequently. The solid US data and Chairperson Powell’s speech did something to settle these fears, albeit not entirely. In another day of above average activity, Wall Street rallied into the back end of the US session, adding around 3.43 per cent according to the S&P500. While still twisted in an ugly way, the US Treasury Curve flattened out somewhat, as the yield on US 10 Year Treasuries rallied 11 basis points, in response to interest rate markets unwinding bets of a Fed rate-cut in 2019. Gold and the Yen pulled back on diminished haven demand, while emerging markets currencies, and their key proxy the Australian Dollar, went on a tear.

ASX: SPI Futures are indicating a very solid 69-point jump for the ASX200 this morning, according to that contract’s last traded price. Despite being wedged between the dual global concerns of slower global growth and tighter global financial conditions, the Australian share-market has shown resilience recently. Aside from a temporary tumble on thin liquidity prior to Christmas to new multi-year lows, the ASX200 has more-or-less traded range bound between 5500-5700 for the last month. Our share market hasn’t quite seen the high-octane activity lately that Wall Street has, with volumes below average and swings in price-action only really spurred by sentiment from US markets. There are general signs of consolidation occurring in the index, however a break in either direction, particularly upon the return of normal trading conditions, appears imminent.

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US-China trade talks: The fortunes of the ASX200 on a macro-scale will be dictated first by US markets, then by the outlook for China. The economic calendar presents as quite thin to begin the week, providing traders of riskier assets room to manoeuvre if the newswires remain clear of outside noise. The primary focus for now will be on the mid-level trade talks due to begin between the US and China today. Major breakthroughs are unlikely in the absence of each nation’s heavy hitter, but the communications coming out of this week’s talks will be crucial. Evidence is mounting that the trade-war is starting to bite, exacerbating existing economic challenges for both sides: market participants will be hungry for indications that an urgency amongst policymakers is building now to resolve it.

The markets’ balancing act: Where markets head from here remains uncertain. Volatility will continue to show-up this week and throughout the rest of January. An easing of fears regarding the state of US economic growth is helpful, but it throws up the paradox: strong growth implies likely tighter monetary policy, which is bad for stocks and riskier assets; weak growth implies the possibility of a recession, which is bad for stocks and riskier assets. There is a middle way, as there often is, between both poles, within which the Fed must traverse. They may well do just that and keep this bull market afloat in doing so. There will be missteps along the way though, meaning (as has often been said) fear and subsequent volatility will spike as market conditions evolve.

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