Mixed trade across the globe: Global equity indices have traded mixed in the last 24 hours. Asian trade was soft, European trade was poor, while US indices look as though they will deliver another day in the green. This may not be such a bad thing: perhaps the differing performance across regional indices is a sign of a more discerning market place. Panic about the global economic landscape has subsided for now, allowing traders to take a more nuanced view of the asset class. There is a degree of divergence happening again between US equities and the rest of the world – though it must be said the ASX is still following the lead of Wall Street. Optimism about fundamentals in the US is progressively being restored; that of the rest of the world is still in doubt.
US macro-outlook apparently strong: The notion the US economy is still on solid footing was supported by strong economic data last night. Both unemployment claims and the Philly Fed Manufacturing Index beat expectations, boosting confidence that the labour market and business activity is strong in the US. As has been repeated many-a-time throughout the recent stock-market funk, economic fundamentals could well be secondary or tertiary to other forces previously supporting equity markets. There are still doubts about the future of financial conditions (read: Fed tightening) and the state of the profit cycle. While the US economy is delivering strong data however, the perma-bears and recessionistas should remain sidelined – at the very least, on the basis that the US economy doesn’t yet appear to be spiralling into recession.
Risk-appetite higher: Price action reflects the change in attitude of market participants. US Treasuries have ticked higher as interest rate traders price out rate cuts from the US Fed in 2019. The yield on the US 10 Year note has climbed to 2.72 per cent, and the yield on the US 2 Year note has reached 2.55 per cent. Even more promisingly, the curve is taking on a slightly healthier shape. It’s still quite unattractive, that’s undeniable. But the 2-to-10 spread is widening, as markets price a better economic outlook and a more accommodative Fed. The lift in oil prices has helped this – one point that is still understated and underestimated by many. The recent rebound in the price of the black stuff has led US 5 Year Breakevens back to 1.65 per cent.
The elusive goldilocks zone: It will still stay a tight rope walk for equities, especially in the US. The financial system is arguably inherently unstable, and policymakers’ job puts them in the invidious position of keeping markets at an equilibrium, despite this instability. Hence, it’s never the case that markets aren’t at risk of losing balance and falling towards one extreme or another. The particular issue with the set of circumstances market participants find themselves in now is that the tight rope is narrower, and the risks have closed-in tighter around them. Economic data needs to remain strong to keep the recessionistas at bay on one side, but not so strong that it results in the necessity of a hiking US Federal Reserve.
US earnings season the new priority: So far, so good for US markets, but of course we are only half-way through January, and there’s a long path ahead of traders, given the risks out in the market place. Focus has been set on US reporting season, given the radio-silence in the trade-war, along with the more dovish-Fed. The financials sector cooled its run on Wall Street overnight, after Morgan Stanley’s results bucked the industries trend of beating forecasts this earnings season. It hasn’t proven so far enough to undermine Wall Street’s recovery. The real interest in gauging US corporate strength will come when the tech-giants begin to report next week. For now, though, keep your eyes peeled for Netflix’s results out this morning: it’s often a volatile stock, and there are big expectations for that company’s latest results.
Risks being shrugged off: Back on the risks to market sentiment, and whatever little issue has been hauled at markets this week has been effectively shrugged off. The news about Huawei facing charges in the US on tech theft didn’t undermine sentiment for long. And the bigger headline story this week, the UK parliamentary vote on Brexit, has actually engendered positivity. The GBP for one is edging higher, with the Cable eyeing off 1.30 now. A better indicator of traders’ attitude towards the UK economy is in bond-spreads. The spread between US 10 Year Treasuries and 10 Year UK Gilts has narrowed further to 142 basis points, as markets price in the chance that UK will be heading for another referendum – one that could well yield a Bremain result.
A trade-war sentiment boost? There’s an hour left in Wall Street trade at time of writing, and sentiment has apparently received the boost it was looking for: news has crossed the trading terminals that the “US weighs lifting China trade tariffs”. Volume has spiked on the news and the S&P500 has broken resistance at 2630. It’s contentious whether this story has merit. Conflicting reports are coming out suggesting there is more to the story than just the headline. A Treasury spokesperson has leapt out to say that neither Treasury Secretary Mnuchin, nor trade Ambassador Robert Lighthizer have made any recommendations to ease tariffs. It’s causing markets to whipsaw. This one might be a live issue this morning. Keeping abreast of its developments in the day ahead could prove beneficial.
ASX keeps grinding: In line with US cash equity markets, SPI Futures are dancing around as traders try to process the news delivered to them. At present, that contract is suggesting an approximate 20-point jump for the ASX200 this morning, up from about 15 before the news release. Whatever the extent of the rise, traders were pricing a positive start for Australian shares this morning. The ASX200 kept defying gravity yesterday, closing trade 0.26 per cent higher at 5850. Indicators relating to the conviction of the session’s move were lacking once more. It’s still January however, and activity is generally lower this time of the year anyway. The ASX200 index looks now to chase down its 200-day EMA at 5910, which itself could prove a significant hurdle.
Written by Kyle Rodda - IG Australia