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Price-action looks ominous for the S&P500: APAC brief - 20 May

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MaxIG

A choppy week ends generally flat for Wall Street: Global stocks ended the week on softer footing. But if one narrows their attention to just the S&P500 as the bellwether, the past 5-days culminated in only a 0.76 per cent fall. Trade continues to dominate sentiment on a macro-scale. The US-China trade-war has deteriorated considerably, with positivity in the market currently being sustained by some vague hope that US President Trump and Chinese President Xi will meet on the sidelines of June’s G20 meeting to discuss trade. A total reversal of tariffs between the US and China looks increasingly unlikely however, so markets wait now for the new trade-barriers detrimental consequences to manifest in market fundamentals.

Risk appetite is waning: Intraday price action on Wall Street somewhat reflected the loosening control buyers have on this market. After a spill at the open, the S&P500 grinded higher throughout trade to turn positive on headlines that the US would be removing steel and aluminium tariffs on Canada and Mexico. It proved to be cold comfort for market participants, however. Volatility edged-up throughout the session, US Treasuries gained very slightly, and the S&P500 shed 0.58 per cent, capping off a day which witnessed a marked flow out of risk-assets, and into safe-haven assets, wherever they could be found.

Price-action looks ominous for the S&P500: The set up for US stocks is beginning to look quite interesting – and relatively ominous. The general view is that Wall Street equities have remained quite resilient, even somewhat calm, in the face of greater trade-tensions. However, given the possible impacts of slower global trade, maybe this is simply the calm before the storm: the quiet, underground evacuation of smart money from the market, before the herd attempts hastily to catch-up. The S&P500 looks to be taking something of a head-and-shoulders shape after Friday night’s trade, portending that another new-low may be in the making for the market in the short-term.

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How do market participants react to more ScoMo? Turning to the ASX200, and markets with an Australian focus, and despite Friday night’s weak end for European and North American stocks, the ASX200 ought to open 5 points higher today. The interest today, of course, will be on picking up what effect the weekend’s election has on local markets. Financial markets move on surprises: things that weren’t prepared for in advance. Such was the favouritism of the Australian Labor Party to take Saturday’s election, market participants, overall, had positioned their expectations for that party’s victory. As is well known, that outcome has not materialized, so interest turns to how market-pricing repositions from here.

Australian Dollar gaps higher this morning: Looking at the Australian Dollar as the first cab off the rank, it has gapped higher this morning, to have climbed by as much as 1 per cent, in early trade. While ostensibly a tacit endorsement of the Coalition and their economic agenda, the trading dynamic is probably more a reflection of a “buy-the-rumour-sell-the-fact” situation. That is: one small unknown is removed from the market, and price has adjusted to reflect this, in something of a knee-**** reaction. The phenomenon, therefore, would probably have been observed even in the event of a Labour Party victory, and is probably not representative of a shift in fundamentals.

ASX200 to begin week on shaky footing: Watching Aussie bonds and rate markets today will be a better barometer for how markets view the economy as-a-result of the Coalition’s election victory. However, given the big issues driving the macro-economy currently, most of which originate from beyond Australia’s shores, the ultimate consequence will be probably be tantamount to short-term noise. Given the lift in the Australian Dollar, and dwindling global-market confidence, the ASX200 may find itself stifled at the outset of this week’s trade – especially after a hot day’s action on Friday, which saw roaring iron ore prices ignite buying activity in mining stocks, and temporarily drove the ASX200 to new 11-year highs.

All interest in the reaction of bank shares: The key to today’s trade will probably rest on the banks. As a sector, the financials arguably have most to gain from a Coalition government, given that policies like capital gains tax reform, negative-gearing reform, and (to a lesser extent) changes to dividend imputation will no longer be forthcoming. Rightly or wrongly, the banks had suffered from the expected implementation of these policies. To illustrate: the financial sector’s 12-month high came a day before last year’s Coalition leadership coup, after which market participants generally shied from buying banks on the expectation (at the time) that that event had handed government to the Labor Party .

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Written by Kyle Rodda - IG Australia

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