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APAC brief - 11 Oct

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Markets spinning in circles as trade-talks get underway: It’s been a slightly dizzying 24-hours for the financial markets. Speculation is on overdrive regarding the likeliest outcomes for the US-China trade talks. Though it seems like chaos, it all amounts to little more than noise, as short-term traders have fun with trying to profit from the swings in sentiment. Fundamentally, little about the talks can be known yet. However, it seems investors’ cautiousness is turning to hope once again. Amidst all the noise, there was other rather high impact news reported last night. US CPI missed expectations very slightly. Some progress has seemingly been made in Brexit-talks between the UK and Ireland. And ECB minutes were also published.


Choppy trade as markets speculate about trade-talks: Financial markets, particularly in Asia, swung from trade-war-headline to trade-war-headline yesterday, as traders madly speculated upon the likeliest of outcomes for current US-China trade talks. It all began with a South China Morning Post report that suggested Chinese delegates were planning to cut talks short, citing disagreements on the terms of discussions. It set off a flurry of reports and leaks from both the US and China, countering, confirming, countering, confirming each bit of news. The day’s trade became very choppy, as sentiment vacillated. The ASX200, just for one, swung from -0.3 per cent loss, to a 0.4 per cent gain, only to close flat for the day.


Funny-money messing with the headlines: Though from the outside it might have seemed that markets were experiencing a series of manic-to-depressive episodes, the truth is a little more benign. The volatility was more a testament to behavioural-finance rather than fundamental economics, with price action more-than-likely driven by short-term traders, probably enabled by computers – or at least their own audacity – in a bid to make a quick buck. The substantial part of the market were at worst non-plussed: market activity was very low yesterday, demonstrating that things were hardly frenzied. Investors, broadly speaking, sat back and waited for firm clues for which direction trade-talks take, before moving decisively in the market.


Cautious optimism takes hold of the markets: And judging by the price action witnessed in markets in European and North American trade, cautiousness is transforming very slowly into hope. Activity has been relatively low, yet still modestly higher than previous trading sessions this week. Stocks climbed across the board, with the S&P500 rallying over 0.5 per cent, the DAX climbing roughly the same, and the FTSE100 registering a 0.3 per cent jump. The better barometers of market fundamentals in bond, commodities and currency markets also demonstrated the greater hope for a trade-détente. The US 10 Year Treasury yield jumped 6 points, gold fell 0.8 per cent, and the Yen dipped 0.4 per cent.


US CPI data shows Fed has room to cut rates: There were several other stories of fundamental significance last night. One: US CPI data was released, and showed that consumer price growth slowed once again last month. The headline monthly figure came in flat, leaving inflation at 1.7 per cent in the US on an annualized basis. The data will only feed the debate currently being undertaken by the US Fed as to how it should approach it’s inflation targeting, as price growth remains chronically low. For market participants however, the soft print is welcomed news. The Fed has the space to cut rates further, with relatively little risk of stoking an inflation breakout.


Pound rallies on apparent Brexit-breakthrough: Brexit was also in the headlines in European trade, and though it manifested little in global market pricing, the news possessed some punch as it applies to UK assets. Optimism was bolstered by reports, following a meeting between UK PM Boris Johnson, and his counterpart from Ireland, Leo Varadkar, that both men could “see a pathway to a possible deal” on Brexit and the contentious Irish backstop. That news sent the Pound on quite a significant rally, pushing over 2 per cent higher overnight. This came despite was another disappointing GDP print out of the UK, which revealed growth in the UK contracted last month.



ECB divided, but still expected to cut rates: The final bit of tier-1 news last night was the release of the minutes from the European Central Bank’s Minutes last meeting. There were two significant messages from the ECB. It collectively sees the need for greater fiscal stimulus in Europe, as the efficacy of monetary policy wanes. And the board remains rather divided on whether a fresh round of quantitative-easing in the Euro-zone will have any benefit to the bloc’s economy. That dissent forced traders to unwind bets slightly of future easing from the ECB. Nevertheless, more rate cuts are still being priced-in, with Euro likely to remain in its fundamental downtrend.


Written by Kyle Rodda-IG Australia

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