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Global stocks - APAC brief 14 Jan

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Global stocks: Global equities will be forced to prove their mettle this week. Price action suggests that for many equity indices, the market is ambling at a cross-road. The macro-economic challenges moving markets in general haven't been resolved. That remained true during last week's trade, which saw global stocks move higher, in general. The difference this week is there are more numerous and higher impact risk-events that could make or break the stock market's recovery. There will be no shortage of potential catalysts to move markets, in the short term, into its next phase. Opportunity for both upside and downside exists. Though given the one-way run experienced on Wall Street, perhaps it should be judged that the risk is skewed slightly to the downside, for now.

US market’s cross-roads: The will of the Bulls was under scrutiny in the latter part of last week. The lingering question has yet to be answered: are we experiencing a recovery, or will this be a faded rally? The S&P500 couldn't manage to break the big-psychological resistance level of 2600. The bulls appeared to simply stall on Friday, with the US market according to the S&P500 closing a very narrow 0.01 per cent lower. Friday's trade amounted to the only negative session for the major-US stock index for the week. The upside-momentum is apparently waning for US equities. The VIX is lower it must be stated, so fear is diminishing in the market. But perhaps confidence is still rattled somewhat by December's market-rout.

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Reporting season looming: A decision to push the market higher or let the recent rally fade must be imminent. Short-activity, according to IG's data, is gradually building in US indices. There will be no room to hide shortly, as traders prepare for the kick-off of reporting season this week. In total, earnings growth is increasingly expected to slow by more than first-assumed. The overriding concern in markets presently is given the weaker macro-economic outlook whether the growth expectations of US corporates will diminish in-turn. The first week of the reporting season is dominated by bank earnings: fittingly enough too, given its the banks that could prove the canary in the coal mine for any fundamental problems in the market and the US economy at large.

ASX200: Once again, the ASX will likely trade in the slip-stream of US stocks this week. SPI futures are indicating a 15-point jump at today’s open, according to the last traded price on that instrument. Like US equities, the conviction of the bulls in the ASX on Friday demonstrated signs of diminishing. The 5800 level is for the ASX200 what is 2600 is for the S&P500: a significant psychological barrier that is coming to represent the difference between recovery and a fading rally. The technicals for ASX200 are looking softer, based on Friday’s market-activity. Breadth was a tepid 37 per cent and volumes were 36.60 per cent below the 100-day average, as the index shed 0.36 per cent to close at 5774 to end the week.

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Australian Retail Sales: Sentiment towards Australian economic fundamentals were bolstered on Friday, despite the ASX’s retracement. Domestic Retail Sales data surprised to the upside, printing 0.4 per cent m/m compared to the forecast 0.3 per cent. Below the surface, the numbers weren’t as strong as the headlines betrayed: the driver of the solid figure was probably the transitory effects of the Black Friday and Cyber Monday promotional periods. Moreover, annualized sales growth fell to 2.8 per cent, from a previously 3-and-a-half per cent. Irrespective of those details, consumer stocks climbed on the news. However, the implied probability of a rate-cut from the RBA increased slightly to around 30 per cent –  though the Australian Dollar did mask this fact, which rallied above 0.7200, in-line with the Chinese Yuan.

Brexit’s meaningful vote: As any market participant would be aware, in this market, any number of surprises can jump-out to rattle traders. Assessing the calendar and data-docket for the week ahead though, little comes close to challenging the mid-week “meaningful vote” on Brexit in UK Parliament as the most significant scheduled event. To put into the context of prevailing sentiment, aside from swings in UK and European rates and currencies, the subject of Brexit has been down the list of trader’s biggest concerns. It makes sense: global growth and Fed policy has far greater economic impacts, while the US-China trade-war is the more pressing geopolitical issue. Nevertheless, Brexit and its implications are an ongoing concern, with the result of Wednesday’s parliamentary vote to influence trader’s outlook for the global economy in 2019.

A weaker outlook for Europe: It’s expected that UK Prime Minister Theresa May’s Brexit-bill will fail to pass the House of Commons. Assuming it does, from there markets are confronted by a series of unknowns. There’s been talk of Labour tabling a no-confidence motion in May and her government; or perhaps even a general election or a second referendum. The balance of risks remain irrefutably to the downside for markets out of this event. The area which ought to worry economic-boffins is, amid what looks like a protracted Brexit-campaign, is Europe’s economy looks headed for a marked slowdown. Although its GDP figures surprised to the upside on Friday, boosting the Cable and UK gilts, the UK’s manufacturing data revealed a considerable contraction in activity, adding to a slew of very weak manufacturing numbers across the European continent.

Written by Kyle Rodda - IG Australia

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