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Bullishness rolls on - APAC brief 17 Jan

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Bullishness rolls on: The bullish correction in financial markets continues, and global equity markets are rolling on. It’s a matter of contention as to why this rally hasn’t been faded, just in the short term. Stocks were oversold on a technical basis, and the market internals were very over-stretched at the deepest trough of the recent sell-off. An elastic band effect was expected – a brief snap back in to place. Perhaps complacency will bite at some stage, and the rally in risk-assets will prove a mere counter-trend. Analysing the price-action however, the buyers are controlling the market. Keys levels in several major share-indices have been tested and breached. Yes, without overwhelming conviction, but the technical breaks of resistance are there. One must respect the will of the market.

Fear falling, confidence rising: Substance in the move higher is lacking, just at present. Fundamental justifications are emerging, though not in such way yet that justifies out-right bullishness in this market. Earnings season in the US has gotten off to a good start, with bellwether banks beating analyst forecasts thus far, and the overstated effects of Brexit have been contained. The meaty part of reporting season is still ahead of us, so evidence US corporates are in a better than expected shape remains wanting. The simple explanation for why market participants are more confident now is that they believe policymakers have their back. Separating the philosophical arguments about whether that ought to be proper reason to take-risk, invest and trade in a financial market, for self-interested traders, that’s enough of a cue to buy-in now.

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The political-economic power-axis: The economic and financial world rests on a tripartite axis of economic power: there’s the US, Europe and China. Every other national economy is in some way a satellite to these economic giants. The best set of circumstances for markets is when all three economies are growing and possess solid financial conditions. At-the-moment, only the US comes close to passing that test in the mind of traders. In the absence of solid fundamentals, the next best thing for markets to hear is that the powerful people in these economies intend to do something big about their problems. This week, and more-or-less since the equity market recovery has taken hold, that is what markets have gotten. After months of feeling abandoned, market participants now feel comforted by policymakers soothing assurances.

Policymakers making the right noises: There has been delivered numerous announcements from key policymakers in the US, Europe and China. The US Federal Reserve has launched a concerted campaign to soothe markets’ nerves, going as far as implying interest rates will remain on hold until signs of greater financial and economic stability emerge. European Central Bank head Mario Draghi acknowledged in a speech this week that the Eurozone economy is sputtering but pledged that the ECB will stand-by with policy support if necessary. And China’s key-economic boffins have implemented a range of policies – from cutting the Reserve Ratio Requirement for banks, injecting cash through open market operations, and sweeping tax-cuts – which have done enough for now to prove to traders they are serious about tackling China’s economic slow-down.

The G20 meeting: The temporary reliance on policymakers to support market sentiment will be put to the test to end the week. Global financial leaders will meet in Tokyo to discuss global economy and the financial world at the latest G20 meeting, in what will certainly be scoured for signs of unity and conviction of purpose. These events are often talk-fests, with little coming out of them more than a rosy-joint press release. But with the way markets have been behaving since the start of January, this may be all that market participants need to keep talking risks and buying back into equities. Talk of stimulatory fiscal policy, looser monetary policy, and better yet, the reduction of trade barriers (read: ending the trade war) will underwrite such risk appetite.

The test of fundamentals: Of course, it’s too reductive to suggest that market activity hinges in the immediate future on the outcome of this G20 meeting. Fundamentals will have to come into play and drag sentiment, wherever it goes, back to reality, whatever that happens to be. The good thing is too, that markets won’t have to wait long to get that reality check. Earning’s season is ramping up now, and while some of the more popular companies haven’t yet reported, some important information is being gleaned. In a positive development, Goldman Sachs reported before the US open last night, and broadly beat expectations by way of virtue of solid results in its M&A division. The numbers further eased concerns that the US banking sector, and therefore US economy, is in an increasingly tough-spot.

Wall Street to the ASX: The sentiment boost there has lead Wall Street higher, supporting what at time of writing looks like an 8-point gain for the ASX200 this morning, according to SPI Futures. Promisingly, the benchmark S&P500 continues its grind through a marshy resistance zone between 2600-2300, which if traversed, will add weight to the notion US stocks have executed a recovery. The ASX200 is arguably a little further down the true-recovery path: yesterday’s trade saw the Aussie index add 0.35% to close at 5835. Buyers ought to become thinner at these levels, with the daily RSI close to flashing an overbought signal. The next key level to watch out for is approximately 5870 based on a read on the hourly chart, however resistance there doesn’t shape-up as particularly firm.

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Written by Kyle Rodda - IG Australia

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