A mixed day for global stocks: It’s been a mixed 24 hours for global markets. A series of conflicting messages are being delivered to traders, after the release of some major corporate reports in the past 24-48 hours. Market participants are truly in the meatiest part of earnings season now. The trader’s eye has been fixed on earnings from US tech and industrial giants yesterday and overnight; with the former, thanks to Facebook and Microsoft, beating expectations overall, but with the latter, courtesy of Caterpillar and 3M, undershooting consensus estimates. It’s all culminated in a high activity, but effectively flat, day for the S&P500, which has added trade 0.1 per cent.

ASX200 seemingly to follow suit: Given the mixed lead delivered by Wall Street (and that of Asian markets yesterday, for that matter) SPI Futures are pointing to a slim 3-point gain for the ASX200 this morning. Two trading days in a row like that which was experienced on Wednesday may be difficult to come by, especially given the lack of a clear catalyst, for now. Perhaps its slightly academic, but the question for many now is how long this rally for the ASX200 can last. With new 11-year highs made, technical levels become difficult to ascertain. However, one useful guide may be the index’s multi-year trend channel: it suggests there remains room for the ASX200 to test higher levels from here.

Wednesday’s CPI numbers: To jump back slightly to Wednesday’s trade, local market participants had their attention firmly fixed on Australian CPI numbers and that data’s implications for the AUD and RBA monetary policy. After a considerable miss last week in New Zealand’s CPI numbers, traders were wary as to whether comparable disinflation was emerging within the Australian economy. These suspicions proved valid: the numbers greatly underwhelmed: inflation printed flat on a quarterly basis, taking the year-on-year figure to 1.3 per cent. The data missed the consensus estimate for annualized price growth of 1.5 per cent – and came in markedly below the RBA’s target rate of inflation of 2-3 per cent. 

AUD drops with AGB yields: Needless to say, markets reacted violently to the news, as traders rushed to reprice their outlook for Australian interest rates. The already sickly Australian Dollar dived over 1 per cent, tearing through a handful of resistance levels within the 0.7000 handle, to trade as low as 0.6964 overnight, before finding technical support. The moves in Australian Government Bond yields were probably even more remarkable: they plunged by as much as 15 points around the front end of the yield curve, and by as much as 10 points around the middle-to-back end of the curve, with overall yield bending into even greater inversion.

Markets betting on two cuts from RBA: Naturally, the fall in the A-Dollar and bond yields was anchored in changing bets about what the RBA ought to do with interest rate policy – and perhaps more importantly, when they might do it. Traders have priced-in almost entirely 2 rate cuts from the RBA in 2019, with a cut fully priced in for the month of July. Remarkably, traders are also betting that the central bank’s meeting in May is more-or-less a “live” meeting. Implied probabilities currently suggest a fifty-fifty proposition that the RBA cut rates at that meeting – even despite the fact it will be held in the shadows of the Federal election.

The USD also weighing on AUD: It’s worth noting too that, in the broader currency complex, weak domestic macroeconomic fundamentals isn’t the only factor enervating the AUD. The USD has touched two-year highs in the past several days, owing to several fundamental and technical drivers. Primarily, the greenback has been bolstered by further poor data out of Europe, which has seen the Euro test life in the 111-handle again. The other, perhaps more curious driver, of green back strength right now, is tied back to circumstance: with Japan about to head into an 11-day public holiday, traders are seeking USD denominated assets in anticipation of a period of (relatively) low liquidity.

The ASX rally helped by CPI numbers: For all the bearishness when it comes to currency and rates markets, the ASX200 is thrived courtesy of the weaker Aussie Dollar and lower discount rates. The ASX had already followed through with Wall Street’s lead on Wednesday by the time CPI data was released. However, the extra leg up that came from the softer inflation numbers and the subsequent expectation of a cutting RBA was the extra fuel to lift the ASX200 to an 11-year high. Much like equity indices across global markets presently, momentum for the ASX is apparently tilted to this upside, even in light of what are currently mixed fundamentals.

Written by Kyle Rodda - IG Australia