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US economy still leads the pack - APAC brief 4 Feb

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US economy still leads the pack: The bounce in global equity markets has been uniform, but the economic data is pointing to a return of the “diverging global growth” narrative. It was what dominated the latter half of 2018: the US is humming, while the rest of the world economy languishes. The difference in economic fortunes isn’t quite so stark now, however it remains conspicuously extant. It becomes a matter of how long such a dynamic can last. Frankly, market participants had resigned themselves to the fact it was already over. But a quick review of even Friday’s economic data alone suggests the narrative still has legs. An all-encompassing global economic slowdown is likely to arrive, eventually. For now, though, the US economy has its head above the water, while rest of the world doesn’t. 

Financial conditions and economic data supportive: The dovish Fed are, and will continue to be supportive of this, as financial conditions loosened once again in response to last week’s FOMC meeting. It’s no mystery to markets: the correlation between a recovery in financial conditions and the performance in equities is clear. The fears of a US recession, based purely on the macro-data, is still unfounded. The numbers coming out of the US on Friday weren’t spotless, but they were still very strong. ISM Manufacturing PMI beat economist consensus forecast, and US Non-Farm Payrolls showed an increase in jobs in the US economy of 304k. The jobs data was marred by a downgrade in previous months jobs-gain numbers, a dip in annualized wage growth, and a tick-up in the unemployment rate. Overall, however, the data showed a still strong US economy.

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Asian and Europe tangibly slowing: This contrasts with what came out of Europe, and really the rest of the world, during Friday’s trade. Europe is clearly heading for an economic slowdown, and it’s becoming a matter of true concern. Chinese economic data reminded traders too that the Middle Kingdom finds itself in its own strife. PMI numbers released from both geographies greatly disappointed market-bulls. The Caixin PMI release revealed a far steeper contraction than what had been estimated, while the balance of several European PMI numbers showed general weakness in the Eurozone – especially the embattled Italian economy. To be fair, European CPI numbers did beat forecasts slightly. But at 1.1 per cent annualized, it remains so far below target that the notion the ECB will hike rates before the next recession seems laughable.

Financial markets neutral bias on Friday: As soft as the numbers were, they didn’t appear to faze traders a great deal. One assumes that the outlook reflected by the data was largely priced into the market. If anything, markets were pricing in a worse (collective) result to the weekend’s data. Interest rate traders lifted very negligibly their bets of rate hikes from the ECB and the US Fed – though it must be said the balance of opinion is in favour of no moves at all in 2019. Bonds sold off based on this, and emerging market assets, which had benefitted most from the dovish Fed, pulled-back to end the week. The US Dollar is in a short-term downtrend, apparently keeping gold prices elevated. The Australian Dollar kept range bound though, hovering around the mid-0.7200’s.

The recovery keeps on rolling: Friday’s trade when assessed on its full merits belonged to the bulls though. Really, the entirety of last week did. It wasn’t a unanimous decision by any means; but it was enough to keep the “V-shaped” rally in equity markets intact. The extremeness of the January stock market recovery has pundits increasingly questioning what the next sell-off will look like. The “shape” of this price action is quite unusual, they are telling us. What was experienced in the last quarter of 2018 was somewhat extraordinary, so perhaps an extraordinary recovery is a necessary consequence of that. Where the market puts in its next low is a point of curiosity: Wall Street has visibly broken its downtrend, so the next low in the market builds the foundations for the next possible uptrend.

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ASX poised to gain this morning: The US lead will translate into a 20-point gain for the ASX200 this morning, according to the last traded price on the SPI Futures contract. Friday’s trade wasn’t quite as bullish for the ASX as it was for other parts of the global equity market. The index closed effectively flat, on a day of above average volume and relatively poor breadth. Iron ore prices, which have maintained a consistent rally since the tragic Vale dam collapse, have fed a rally in the mining stocks. The materials sector added 4 points to ASX200 on Friday and looks poised for further upside moving forward, as another shifter higher in oil prices, a weaker USD, and general market bullishness support elements of international commodity markets.

The banks under scrutiny today: The challenge for the market will be trying to sustain a move higher while there remains so many concerns about the financial sector. The final report from the Hayne Royal Commission is released after-market today, and the uncertainty generated by what will be recommended in the report is keeping upside in bank stocks, and therefore the ASX200, at bay. Only time will truly tell what recommendations will come from the report – with less than 12 hours until its released, markets need not wait long for answers. Whatever is revealed, it will be assessed through the lens of how it may impact future credit conditions in the Australian economy, especially given the major slowdown in Australian property prices, and the recent slowing of consumer credit growth in the overall economy.  

Written by Kyle Rodda - IG Australia

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