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Positioning for the week’s climax - APAC brief 4 April

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MaxIG

Positioning for the week’s climax: A little water-treading, as all eyes turn to Washington this weekend. And for two-reasons, really: highly anticipated trade-talks between the Trump Administration and Chinese officials – which includes Vice Premier Liu He; and the release of US Non-Farm Payrolls data by the US Bureau of Labor Statistics. Both promise to be potentially market moving events. Fundamentally, both events come in one-and-two as the week’s most significant macro-economic stories. How each unfolds will provide market participants with some key insights into the financial world – as it stands now and into the future. Is the US economy working to full capacity? Can the US Fed keep stay safely on the sidelines? What’s the potential for a global growth rebound?

Stocks trade on low activity: With some crucial information promising to be revealed relating to these questions out of these events, financial markets in the last 24 hours have traded on a let’s wait and see mentality. Wall Street traded mixed: the S&P500 hovered in and out of “the green”, as the momentum in US tech stocks stalls. European equities, on balance, pulled back throughout the day, unaided by some weak German economic data. Asian trade was also lacklustre, with the Nikkei trading flat, the Hang Seng down, but Chinese indices generally clocking gains. Despite the mixture of results, the constant was generally a lack of volume in stock-markets, likely symptomatic of a market watching vigilantly for its next cue.

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Bond prices edge higher: On this basis, a rotation into government bonds materialized. Bond markets have settled-down after last week’s hysteria, and considering current fundamentals, have found something of a happy place. The safety has been sought in 10-years: the US 10-tear Treasury yield is down a basis point-or-two to around 2.50 per cent, for one. The US Dollar has been sort-out in general. Less a function of an overall search for liquid assets, the greenback has benefitted more from a fall in the Euro because of poor German Factory Order numbers, as well as another dip in the Pound on sustained concerns regarding Brexit. Speaking to the neutral sentiment in the market: the Japanese Yen is only marginally higher, as is gold.

Market watch I: trade-talks: So that's how market participants have positioned for the weekend's big events, but what are they looking out for? Because of its political ramifications, trade-talks will be the headline grabber. Arguably, markets are a little exhausted by the trade-war. Holding onto hope can be exhausting; and judging by the diminishing impact of trade-war news, traders are tired of speculation and want substantial answers. A de-escalation in the trade-war is practically priced-in to the markets now. Future strategic consequences aside, the market-moving variable is probably going to be whether US and Chinese negotiators can flag a clear removal of at least some of the tariffs imposed on one another.

Market watch II: US NFPs: As far as US non-farm payrolls go, the state of the US labour market always sits at the front of the carousel of concerns for market participants. Of late, however, the data itself has taken-on some new dimensions. Whereas in the recent past -- and we are talking in months, to maybe years -- it's been all about wage growth and the inflation outlook, as an extraordinarily low unemployment rate stoked concerns of an inflation outbreak in the US economy, and subsequently higher interest rates. That issue still exists. However, now, markets have to deal with another layer of complexity: the fear that the US economic machine is slowing down; and may lack the capacity to maintain labour market strength.

Just a bit of profit taking? In our neck of the woods, SPI Futures are suggesting the ASX200 will translate the overnight-action into a 6-point loss at the open today. Australian equites are standing as an outlier, based on futures markets, across the Asian region. Most other futures contracts are pointing to a reasonably positive start for Asia’s major indices. Aussie stocks gassed out somewhat yesterday, proving the most notable laggard across the equity index map. Given it was the outlier, a single domestic cause for the broad-based selling on the ASX is difficult to determine. The market did sell-off from a 70 reading on the RSI, so perhaps we can chuck-out the old cliché and chalk-up the move to “profit-taking”.

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Reactions to an unofficial budget: Lacking a strong lead to follow this morning as markets await tonight’s key risk events, perhaps the curious matter for the ASX today will be how the market react to last night’s budget reply speech from Labor leader Bill Shorten. Aside from some quizzicality as to why the opposition leader kept bandying around the yield on 10 Year bonds as evidence for his economic argument, market participants may take greater notice of the detail contained within the budget-reply than that of the official budget on Tuesday. Markets like to play with and price-in probabilities; and given the balance of probabilities suggests a Labour government come next election, perhaps last night’s policy announcements will create greater impact than those announced on Tuesday.

Written by Kyle Rodda - IG Australia

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