The start of something new: A new day, week, month and quarter today; and what a difference a little time can make. 3 months ago, at least for some, global financial markets stood at the brink of ruin. It was December 24 last year that the S&P500 hit its low, but it wasn’t until the start of January that something resembling a turnaround in US stocks transpired. Fast forward to now, and Wall Street is over 12 per cent higher, and though at stages has looked extremely vulnerable to turnarounds, or at least pull-backs, to date, no such thing has occurred. And now, after Friday’s trade, the whispering speculation is whether the S&P is headed for new all-time highs.
Wall Street eyes all-time highs: Given the balance of risks, there’s more than a negligible chance that will occur. This isn’t to say that’s it’s the likeliest of outcomes in US stocks presently, but the conditions are certainly in place to foster it. As has been covered off innumerable times, the market’s initial turnaround and subsequent follow through has in large part been central bank engineered. Led by the Fed, and dutifully followed by the ECB, BOJ, BOC, RBA and RBNZ, interest rate expectations completely reversed course in the past quarter. A world once preoccupied with calling the next round of rate hikes has been replaced with one speculating on when global central banks will cut next.
A central-bank made rally: The subsequent loosening of financial conditions has ignited this multi-month rally. From its highs in October last year, the 10 Year US Treasury note has fallen over 80 basis points. The Fed has gone from “a long way from neutral”, to being “on autopilot”, to straight-up “patient” with their monetary policy. Say what you will about the Fed, there actions are a lesson in human fallibility and the inherent ambiguity in predicting the future. Not that the markets fundamentally care: Homeric lessons and questions of morality don’t concern it much. The foundations for risk-taking were reinstated, implying that whether right or wrong, as a matter of principle or policy, a gobbling up of risk-assets is justified.
Fighting the cyclical slow-down: Of course, this dynamic has all played-out at a stage of the business cycle that might be described as “late stage”. Geopolitics has done its part to undermine market sentiment, and hobble economic activity in particular geographies. But as time goes by, more and more it appears that these issues are peripheral, and are causing a marginal impact to a global economy that is already in the process of slowing down. China is attempting re-engineer and reboot its growth engine. Europe, with all its problems, is feebly fighting-off recession. And the US, as the final bastion of economic strength in what we call the global economy, is showing signs its hit its peak for this cycle.
The world outside the US: There remains a sense of inevitability about an economic slow-down. Naturally, it will prove a challenge to arrest. While market participants remain obsessed with Wall Street, and in our neck of the woods, the fortunes of the ASX200, some of the other major share indices have experienced less of a straightforward run higher. European stocks have sputtered at stages, the Nikkei is as prone as ever to risk-on/risk-off volatility, and China’s equities have been fitful. In these markets, the appeal of lower rates, against an expected global economic slowdown, has been less manifest. When looked at collectively, and stripping away US equities, global stocks as an asset class remain well away from their highs.
Hope springs at the start of the new quarter: So, markets haven taken to risk knowing the stakes: policy makers have opened the doors to risk taking, and market have little choice but to walk through it, at the risk of being left behind. Future earnings growth is being carefully studied, within the broader macroeconomic environment. If expected earnings begin to turn negative, then it’s expected a rush to the exits will ensue. The hope becomes, therefore, that what policymakers are doing the world over will time turn the global-economic ship around. A big and slow-moving ship indeed, however as always in markets, hope springs internal: positivity has been piqued to begin the quarter by Chinese manufacturing PMI data released over the weekend showing green shoots in China’s economy.
ASX to stay global-growth sensitive: For the ASX200, its fate rests in large part this becoming a new-trend. It will take some of the internal pressures stifling Australia’s economy, and keeping domestic conditions muted while policymakers attempt to fight-off our own slowdown. Signs of a pick-up in risk appetite are becoming more apparent on the ASX, though. The play into tech and bio-tech are always good signs. A fluke rally in iron can persist in the short-term and keep the materials space performing well. The fall in the Australian Dollar and RBA rate expectations has done its bit to bolster the market as well, attracting capital to our markets, and inspiring a chase for yield in defensive sectors.
Written by Kyle Rodda - IG Australia