Traders have plenty to catch up on: As one might expect after (effectively) four days-off, there’s plenty of macro-economic news for Australian market participants to catch-up on following the Easter-holiday break. Chinese and Japanese markets have traded without interruption; while the US jumped back in to action overnight. And although price action won’t be the cause of any conniptions across trading floors this morning, there’s still enough information there to inspire a few novel ideas in the minds of traders. It will be this digesting of old news that will be the most significant determinant of market activity this morning: the corporate and economic calendars are rather bare to begin the week.
Stocks tread water as US earnings news pauses: SPI Futures are pointing to a very modest jump for the ASX200 this morning of 5-points, after a more-or-less flat session on Wall Street. The S&P500 added a paltry 2-points, or-so, during North American trade, as the steady flow of corporate earnings that began last week was suspended for the holiday-break. The relative lull in price action speaks-of a market primarily preoccupied with company earnings – despite ample market moving news impacting individuals market sectors. As has been said before: traders are searching for validation from US corporates that earnings, along with global growth, can be expected to turnaround.
Data supports US economic outlook: To an extent, such a view is being priced-in marginally, at least as it applies to the US economic growth. US GDP figures will punctuate the end of this week’s trade; but in the lead-up, rates and bond markets have been slightly upgrading their outlook for US growth. Much of this centred on the US Retail Sales print last Thursday night, which surprised considerably to the upside, and alleviated some of the concerns relating to the state of the American consumer. After March and early April’s rally, US Treasuries are retracing their gains, as traders moderate their bets of cuts from the US Federal Reserve.
Bond yields lift on hopes for global growth: Currently, the 10 Year US Treasury note is yielding just shy of 2.59 per cent – up significantly from the March low of 2.36 per cent. Moreover, the implied probabilities of a rate-cut from the US Fed before the end of 2019 has fallen from an almost 80 per cent chance, to a 50-50 proposition as it currently stands. The factors driving yields in US Treasuries haven’t quite translated equally into other safe-haven government bonds: though higher, weak European manufacturing PMI numbers last week have weighed on German Bunds, while soft UK inflation numbers last week have kept UK Gilt yields in check.
US Dollar maintains a bullish bias: Naturally, the outperformance of US Treasury yields relative to government debt of similar quality has lifted the US Dollar. Albeit still its end of February highs, the US Dollar Index tested 97.50 during Friday night’s trade, as traders backed out of the Euro and Pound. The combination of a strong US Dollar and generally higher global bond yields has legged gold prices, which broke and held below significant support/resistance at $1280 per ounce. Of course, the stronger greenback hasn’t spared our Australian Dollar, with the local unit abandoning its “growth-proxy” and iron-ore price led rally, to trade back in-line with yield differentials.
Chinese policymakers to temper stimulus: As far as the Aussie-Dollar, and other global-growth exposed assets goes, upside momentum has been dulled over the weekend, on decreased expectations of future Chinese monetary stimulus. The dynamic can be witnessed in Chinese equities, too, which shed over 2.24 per cent yesterday. Illustrating well the modern central bankers’ essential-dilemma: Chinese stocks pulled-back, and their bond yields climbed, on news that China’s policymakers will likely temper the extent of their stimulus efforts in response to improvement’s macro-economic fundamentals. The tight-rope walk raises the possibility once more of volatility in China’s markets, as policymakers balance the need for short-term stimulus, with necessary long-term structural reforms.
Oil prices rally on Iran sanctions: The final development worth being wary of from the long weekend’s market news-flow was action in oil markets. Prices have rallied in response to news that the US would be ending waivers to other oil importing nations purchasing Iranian oil. Already in a steady upward trajectory courtesy of managed production cuts from OPEC, the price of Brent Crude has spiked 3 per cent, lifting stocks in the US energy sector overnight. Of greater import, so to speak, to market participants is the impact oil’s rally may have on global interest rates, as traders ponder the potential impacts of higher energy prices on future inflation.
China’s data inspires relief: The Middle Kingdom was at the centre of financial market focus yesterday. Informally dubbed the “monthly economic data-dump”, market participants were granted the opportunity to test the thesis that the global economy’s Q1 malaise is turning around. And though it was only one set of numbers, the answer received from the Chinese data to this quandary was to the affirmative. China’s GDP figures beat economist’s estimates, printing at 6.4 per cent against the 6.3 per cent forecast; and the litany of other data-points, most notably retail sales, industrial production and fixed asset investment, all either exceeded forecasts, or showed signs of improvement.
The global economy’s resurrection? The Chinese data has added further credence to the notion that China’s economy, and therefore that of the rest of the globe, isn’t about to fall off the cliff. Judging by the improvement in the numbers, policymakers intervention and receptiveness to market and economic trouble, not just in China but globally, is apparently feeding through into economic activity. Although global equities, and especially Chinese equities, resisted reacting to the good news – the lower likelihood of greater monetary stimulus can explain that one – growth exposed assets conveyed the market’s greater optimism and risk appetite, boding well for risk-assets into the longer term.
Traders bet on economic turnaround: As always, we need not look any further than our Australian Dollar to judge the merits of this case. Granted, it’s cooled its intraday rally somewhat now, but the local currency spiked upon the release of the Chinese data yesterday, breaking through (briefly) its 200-day moving average, and experimenting for a while with a life above the 0.7200 handle. The enthusiasm for the Australian Dollar was tempered overnight, as traders factored in more fundamental concerns pertaining to the Australian economy into market pricing. Nevertheless, the brief spike in the market’s favoured growth proxy proved that traders aren’t averse to placing bets on a global economic turnaround.
Sentiment overriding A-Dollar’s fundamentals: Sticking to the Australian Dollar, and a reflection on the currency’s fundamentals portrays the opposing forces driving its price action, at present. In fact, market-action yesterday reflected the “growth-proxy” versus “weak-fundamentals” dilemma well – with the latter proving an inhibitor of the enthusiasm demonstrated by the former. Prior to the Chinese data release, the Aussie-Dollar looked ready to shed its recent gains, after New Zealand CPI figures notably missed economist’s estimates. The response from traders to that release was to price-in more aggressively rate cuts from the RBNZ and, due to belief the New Zealand and Australian economies share major commonalities, the RBA, too.
Iron ore retraces its gains: Another driver of A-Dollar upside went missing yesterday, too: iron ore prices have rapidly retraced their recent gains, falling over 7 per cent from its recent highs. The tumble in the price came counter to the intuitive logic that perceived improvements in the global economy ought to lead to a lift in commodity prices. Proving once more that iron ore’s rally has been a function of supply shocks rather than economic fundamentals, the market sold contracts for the mineral after news hit the wires Vale would be reopening one of its major Brazilian mines, potentially marking the beginning of the end of underproduction in that market.
Fall in iron ore prices drag on the ASX: Naturally, iron ore’s fall legged materials sector stocks yesterday. It was one factor, combined with the rallying Australian Dollar and slight lift in discount rates, that lead to an overall fall in the ASX200. The theme seems likely to continue today, too. According to the SPI Futures contract, the index ought to drop about 21 points at this morning’s open. Today may prove one of those days where the markets direction is determined by the resilience of the banks: financial stocks added 17 points to the ASX200 yesterday, masking a weak day for Australian stocks, which traded on less than 40 per cent breadth.
A busy day leading into the long weekend: Trade across the rest of the globe in the next 24 hours may well be dictated by pre-positioning for the Easter weekend holiday. Wall Street trade was characterized by relatively higher activity overnight, but the results were underwhelming, with the S&P500 dropping 0.23 per cent, and (fittingly) closing bang-on 2900. Despite the assumed reluctance from traders to make big bets leading into a long weekend, economic data will be dense: Australian employment figures are released this morning, before focus turns to a swathe of high impact European PMI numbers, and US Retail Sales data tonight.
Written by Kyle Rodda - IG Australia
Please see the expected dividend adjustment figures for a number of our major indices for the week commencing 15 April 2019. If you have any queries or questions on this please let us know in the comments section below. For further information regarding dividend adjustments, and how they affect your positions, please take a look at the video.
NB: All dividend adjustments are forecasts and therefore speculative. A dividend adjustment is a cash neutral adjustment on your account. Special Divs are highlighted in orange.
Special dividends
Index
Bloomberg Code
Effective Date
Summary
Dividend Amount
MEXBOL
WALMEX*MM
23/04/2019
Special Div
35
As you know, constituent stocks of an index will periodically pay dividends to shareholders. When they do, the overall value of the index is affected, causing it to drop by a certain amount. Each week, we receive the forecast for the number of points any index is due to drop by, and we publish this for you. As dividends are scheduled, public events, it is important to remember that leveraged index traders can neither profit nor lose from such price movements.
How do dividend adjustments work?
This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.
ASX to keep trading on its own themes: SPI Futures are presently indicating an 18-point jump at the open for the ASX200. Once again, Australian equities look as though they’ll march to the beat of their own drum today. It comes on the back of a reasonably solid day for the ASX yesterday – though admittedly it was another day of relatively low activity. A general driver for the session’s activity was hard to pinpoint, perhaps fortunately, with the market trading much more on the basis of the myriad micro-concerns impacting individuals shares and sectors. It may be a dynamic that set not to last, as market participants prepare for a significant “macro” day today.
A dovish tilt from the RBA? Not that such themes were entirely absent in the local market yesterday, just that they proved insufficient to markedly change the narrative for the ASX. The RBA’s meeting minutes were released yesterday, and more-or-less confirmed the suspicions of market participants: the central bank is entertaining the idea of possible interest rate cuts in the future. Always the first to take the conservative route, the RBA was clear to state it merely discussed under what circumstances a rate cut would be necessary and were explicit in their view that such a set of circumstances aren’t present within the Australian economy right now.
RBA keeping their powder dry: As is reasonably well known, the RBA’s central thesis is that although global growth conditions are softening, and that there remains major domestic economic headwinds, while the labour market keeps tightening, there exists no immediate need to cut interest rates. Furthermore, the RBA outright acknowledged, in perhaps what is a small hint at government policymakers, lowering interest rates wouldn’t deliver the same impact to economic conditions as they had in the past. Nevertheless, traders concluded from the simple recognition of the possible need for further monetary stimulus in Australia’s economy as a sign that the RBA is losing confidence in the local growth engine.
AGBs out of step with global bond markets: The result was a brief fall in the Australian Dollar following the release of the RBA’s minutes, as traders repositioned their bets on the future of Australian monetary policy. Having unwound recently positions that the RBA would need to cut rates by August this year in response to a moderating of global growth fears, yesterday’s minutes forced the market to increase the implied number of interest rate cuts before the end of 2019 to about 29 basis points. The knock-on effect saw AGB yields fall, out of step more broadly with bond markets, which experienced a general climb in bond yields yesterday.
Growth concerns diminish; but risk appetite neutral: As might be inferred from the moves in bond markets, trade overnight was characterized by a further diminishing of fears about the outlook for global growth. US 10 Year Treasury yields were up by 3.6 basis-points to 2.59 per cent, and 10 Year German Bunds maintained its (albeit slim) positive yield. It was by no means a total risk-on day, however: stocks were up globally, with the world-indices map a sea of green indeed; but looking at the S&P500 in particular, it was only 0.05 per cent higher for the Wall Street session, as investors digest US earnings season bit-by-bit.
China to dominate today’s proceedings: A very significant read on the state of the global economy comes today: the so-called “monthly Chinese economic data-dump” is delivered– and this time around, it includes the Middle Kingdom’s GDP numbers, too. The turnaround in fortunes for global risk assets lately has largely come in shifting perception about China’s economic wellbeing. There is greater hope that China’s economic slowdown, which had rattled market participants in the first quarter, has bottomed-out. Core to further upside for risk assets, improvements in China’s embattled economy is a necessary precondition for optimism towards the macroeconomy and for global stocks to maintain their trend higher.
Chinese equity markets’ catch-22: So, equity markets in developed economies need to see strength in China’s economy to sustain themselves. However, and perhaps somewhat ironically, the case isn’t as clear cut for China’s financial markets. Chinese equities have outperformed global peers year to date, as markets position for looser financial and fiscal conditions to support growth in the Chinese economy. Less a reflection of strong fundamentals, it’s been this loosening of fiscal and monetary policy that has driven capital flows into riskier assets. Being this way, strong economic data out of China may reduce the requirement for such accommodative policy-settings and inhibit short-term upside in Chinese stock indices.
Earnings optimism tempers the markets’ mood: Financial market participants curbed their enthusiasm yesterday. Friday’s brief excitement on Wall Street relating to a handful of earnings beats from some of the US’s big banks failed to translate into meaningful momentum to begin the new trading week. Such a dynamic was also evident throughout the Asian session. The ASX200 closed flat for the day, and Chinese stocks rallied and retraced all in the space of a few hours. The Nikkei was higher for the day; however, that was largely due to a markedly weaker Japanese Yen, with that currency unable to reclaim its losses after Friday’s risk-on move.
Sluggish trade on Wall Street: The activity on Wall Street overnight was very much of the “let’s-now-wait-and-see” variety. The behaviour is sensible and based on a sound enough logic. Earnings seasons are a long-slog, with the possible arduousness of this reporting period even greater given the prevailing global economic backdrop. The return of thinner trade conditions, which of course were attributable in part to a level of Monday-itis, betrayed this cautiousness during the North American session. Volumes were below average, and market-breadth was meagre: 38.8 per cent of stocks were higher across Wall Street, with only 4 out of 11 sectors registering gains for the session.
The next bullish impulse being sort out: If traders are unwilling to carry-through with their bullish bias, it bears questioning what presently stands in their way. The obvious answer is a general uncertainty as to whether US stocks will outperform their lowly Q1 earnings estimates; and whether an improvement in forward guidance is delivered by US corporates. But where might the substance of this answer be discovered? If last night’s trade is any indicator, it won’t be US bank stocks. After JP Morgan’s surprise beat on Friday night, the numbers released by the likes of Citi and Goldman Sachs, though solid, didn’t engender quite the same excitement.
Markets wait for bellwether earnings: Instead, the meatier part of earnings season will come when market participants receive updates from the major tech-giants and big industrial companies. The rationale for this view is simple enough: the two key sticking points for the market at-the-moment pertains broadly to risk appetite and macroeconomic growth. As last year’s record run and violent correction will attest to, the US tech sector is the bellwether for what desire there is to punt big on growth-stocks. While the powerhouse American industrial companies will provide the ultimate read on what impact the slow-down in China and Europe is having on corporate profits.
ASX likely to keep doing its own thing: The problem is market participants must wait a few days-to-weeks to receive clarity on these matters. For now, traders turn to the Asian session, and that of the ASX in particular, with few chunky leads to determine this region’s early fortunes. SPI Futures for one are pointing to a negative start for Australian equities, with that contract predicting a 16-point drop at the open. It backs up another day where the ASX traded seemingly according to its own will: a lift North American banks perhaps support our own somewhat, however the ASX200 experienced a meandering day, trading in a narrow 20-point range.
RBA Minutes the key risk event today: Event risk during Asian trade today is relatively light from a global perspective. But for those with an interest in the Australian-macro landscape, RBA Minutes will be one to watch. Since the RBA’s monetary-policy-decision a fortnight ago, traders have moved gradually to temper their bets on the extent of rate cuts from the central bank in the year ahead. By way of virtue of diminishing fears about the state of health of the global economy, traders have reduced the number of implied interest rate cuts by the RBA from about 1-and-a-half to just over 1 before the end of 2019.
Australian Dollar feeling the love: The restored confidence in the global macro-economic outlook has manifested in the Australian Dollar. Though its begun the week listless, the AUD has held onto its short-term trend, to be currently trading just below a few significant resistance level at the prices 200-day moving-average. Despite the yield story apparently unsupportive of the move in the currency, the climb in iron ore prices combined with speculation of further improvements in the global economic outlook is apparently underpinning Aussie Dollar strength. A break over the currency’s 200 day moving-average may well indicate a further run higher for it is afoot.
Activity lifts to end last week: A risk laden week has ended with a pop. Asian and European trade was solid, albeit dull. However, it was a clear-cut-case of risk-on during the North American session. The new fuel to the S&P500s fire came as US earnings season kicked-off in earnest. JP Morgan, and a handful of America’s other big-banks, reported and generally surprised to the upside. The catalyst served two purposes: one, it supported (granted prematurely) the view that assumed earnings growth across US equities may be too low; and two, it pushed the S&P500 above key technical levels – notably, psychological resistance at 2900.
Traders are US earnings focused: That milestone, which has been clocked on three occasions in less than 18 months now, triggered a lift in trading volume that had otherwise alluded US stocks last week. As its been stated before: this is a stock-market primarily concerned now with earnings growth, before anything else. And the reasoning is logical: whether right or wrong, markets have priced in a dovish Fed, and something of a bottoming in global growth. Now what’s needed is a validation in the earnings outlook; less one that applies to the current earnings season, and more those of which to follow in quarters ahead.
Market internals validate momentum: The first signs of that were delivered on Friday evening, so markets flicked the risk-switch. Once again: there was a marked increase in trading volumes during Wall Street trade, providing a very short-term confirmation signal that substance exists behind the market’s latest foray higher. Intra-day breadth was also solid, with 76 per cent of stocks, and 10-out-of-11 sectors, gaining for the session. This adds to the already bullish breadth signals in other, deeper measures of market internals. For one: the NYSE advanced-decline measure has remained, and again turned positively, to the upside, reveal solid momentum in the market.
Fear-falling; but anxiety remains: Thus, with 2900 broken on the S&P500, barring any external shocks, the rest of the earnings season on Wall Street will probably end-up a day-to-day countdown to a new record-high for the S&P500. With all the excitement that captured market-participants on Friday, the VIX has plunged to new year-to-date lows. While the drop in the “fear-index” can easily be explained away, it probably doesn’t reflect the true-trepidation in the market at-the-moment. The rationale for very subdued implied volatility is very comprehensible. Nevertheless, memories are crystal-clear of what happened the last couple of times the S&P500 traded this high with volatility so-low.
The bears are still hungry: Vol-canos, vol-pocalypses: they were two of the portmanteau floating around after big-spikes in the VIX last year following short periods of suppressed implied volatility. Hence, although US stocks sit nominally less than 40-points from new records, historical memory, mixed with market-fundamentals that are less favourable to those that supported previous record highs, has this latest record-run viewed through jaded-eyes. Despite constantly being proven wrong, the necessary pull-back in US stocks during Wall Street’s big V-shaped recovery still ought to be upon us, according to bears. Market participants’ complacency, as betrayed by the VIX, will only contribute to another correction and volatility break-out in time.
The missing agitator: It’s true that the S&P500 is edging towards overbought levels when looking at a medium-term time frame. However, although the global economy is lacking the fecundity present in previous record-breaking rallies, a few ingredients that were present in recent sell-offs are missing. First of all, price-to-earnings ratios aren’t as stretched as they were in October and February last year. But more importantly, the key impetus for those two sell-offs will probably remain absent this time around: discount rates, although edging higher on Friday, are unlikely to rain-on-the-parade, with the US Federal Reserve all-but locked into keeping interest rates on hold.
The ASX’s loose relationship: So: with this in mind, entering the week, and a period of high-impact corporate data, risk-assets sit cautiously on the precipice. The gravitational centre of financial markets is Wall Street, and consequently, its internal dynamics will be a large determinant of how markets trade this week – and for a little while yet. Of course, its influence will be of varying significance depending on the market in question. For one, the ASX200 is an index that has recently moved in relation to the S&P500 like Pluto does to the Sun. Today, even despite Wall Street’s bullishness, SPI Futures point to a flat start for the ASX.
Written by Kyle Rodda - IG Australia
A week that’s (so far) under-delivered: Anything can happen in the space of 24-hours in financial markets. But as we enter the final day of trade in global markets for the week, activity today is shaping up as being just as tepid as that which we’ve experienced in the week’s first four days. It was hoped some new, market-moving information may have been delivered in what was a back-loaded week. Afterall, there was no shortage of event risk. However, thus far, despite a litany of risk events, many of which yielded positive outcomes, market participants have responded to the stories with a shrug.
Market fundamentals take priority: Hence, we meander into this Friday having acquired some useful information about the world, but little in market pricing to show for it. It’s been said before (in fact, it’s been said a lot this week): market participants have developed a singular fixation on upcoming US earnings. And perhaps rightly, and comfortingly so: in a world where markets are dominated, even distorted, by macro-drivers and central bank policy, right now, company fundamentals matter more. It may seem trite to suggest so; however, it would be imprudent to underestimate how overwhelmed fundamentals become in a market dominated experimental monetary policy.
Corporate earnings to be a risk barometer: The matter is now, that with Wall Street perched inches away from record highs, and the world’s other major indices well-off their lows, market participants need evidence to justify such a phenomenon. At that, it goes beyond just a micro-level concern of shareholder earnings. With the major risk to global markets the prospect for an uncomfortable economic slow-down, the forward guidance provided by US corporates will be used to form an abstract story for macroeconomic outlook. Market participants know that in the short term, the current state-of-affairs is unfavourable; what the bulls wish to see now is evidence of strength in the long-term.
When the micro becomes the macro: A such, the micro-matters become important for macro-watchers, too. Arguably, this week has proven that, in a reversal of the status quo, micro-concerns have superseded those of its overbearing bigger-brother. The state-of-play now is markets have practically discounted fully the 4-and-a-half per cent fall in earnings growth projected by analysts for the quarter. What matters now is how future guidance is modified in response to the commentary and financials put forward by corporates. If that becomes downgraded out of earnings season, too, then Wall Street’s, and global equities big V-shaped recovery may come into question.
A faith in the market’s high priests: The bar is still set quite high, with a nearly 7 per cent rebound in earnings on a quarterly basis expected come next quarter. This will come seemingly without a major boost to corporate America’s top line. Much of the rosiness in this outlook is embedded within a hope, however reasonable, that the recent monetary-dovishness and fiscal intervention from some major economic players will reignite global growth. From the Fed’s dovishness, ECB’s return to a completely neutral policy bias, and massive fiscal intervention from China’s government and PBOC, the concerted efforts of policymakers are expected to succeed in turning global growth around.
Bonds recalibrating to growth expectations: Market participants are more optimistic that the worst of the turbulence experienced in the global economy in Q1 is behind us. That’s being revealed in a recalibrating in global bond markets, in response to some reasonable economic data. US Treasury yields are lifting across the curve, following the face-ripping rally in bond markets only a fortnight ago, in response to a tempering of expectations of monetary policy easing by the US Federal Reserve. Though the next move from the Fed is expected to be a cut, the odds this will happen before the end of the year is now about 50/50.
What will the impact be on the ASX? The correlation between the ASX200 and S&P500 isn’t terribly strong. SPI Futures are betraying this today: the S&P closed flat today, but the ASX200 ought to open 21 points higher. The local share-market has traded on its own themes of late, ranging from the oft-cited lift in iron ore prices, and the weakness in bank stocks in response to local property market weakness. Global growth remains a sensitive-point for the ASX, nevertheless, with the chances the bifurcation in Australian and US markets possible enough in the situation that US reporting season surprises to the upside or downside.
Written by Kyle Rodda- IG Australia
Event risk passes with no surprises: The litany of economic data provided market participants the green-light they were looking for; but so far, the price-reaction, while bullish, has been subdued. Relative to the past 100-days, volume on Wall Street, and a majority of developed markets, has been thin overnight. It’s giving the impression of a stock-market bereft of conviction, as nervousness sets in as the S&P500 edges towards new record highs. Admittedly, much of this phenomenon could be attributed to the upcoming US reporting season: while risk-taking is being encouraged by policy-makers, a true validation in corporate fundamentals needs to accompany the oft-touted accommodative global monetary policy settings.
Fed the highlight overnight: Nevertheless, the knowledge that monetary policy from the world’s largest central banks will remain supportive is a necessary precondition to any rally in equity-markets. Last night’s trade, and the data that was released and monitored within it, spoke of such a necessity. Naturally, it was the words of the Fed that held the greatest weight – this time, contained within their latest monetary-policy minutes. The information contained within them wasn’t new; however, it did confirm the stance makes have recently savoured. The majority of the Fed saw the need to remain qualifiedly “patient” in the face of “significant uncertainties”.
US inflation-risk still low: The Fed’s dovishness was backed by US CPI overnight, which acted as tangible evidence for that central bank’s policy stance. Though headline inflation beat economist’s estimates, this was largely due to energy price volatility, with the “core” component of the number falling to 2.00 per cent on an annualized basis. The data itself saw the bets of interest rate cuts in the US increase marginally, prompting a fall in US Treasury yields across the curve. Moreover, 5 Year US Breakevens, while ticking slightly higher overnight, point to US inflation remaining below the Fed’s “symmetrical” 2 per cent target rate.
ECB played second fiddle: Not to be outdone, the ECB met last night, too, and delivered approximately no surprises. Another rubber-stamping of the global monetary policy outlook, it seems. The ECB had already told the markets that it sees the need for a maintaining of its interest rate settings well into the future. The effect on Euro-zone rate expectations was practically the same as those in the US economy. Tighter policy settings from the ECB before year end has been all-but priced out; with negative interest rate policy, as well as many of the ECB’s more exotic policy tools, apparently here to stay for the foreseeable future.
A nonplussed currency complex: As the race to the bottom in global interest rates resumed, currency markets appeared to have a little trouble working out what it all means. The US Dollar was the primary laggard in the G4 currency-complex, as the Fed seemingly won this round of Who can be the biggest dove? The Euro was up slightly against the USD; however, it was down against most its major crosses. The Yen climbed, but not as anti-risk trade. As it relates to the AUD, it climbed higher in the 0.7100 handle, as the yield differential between the US and Australian government bonds narrowed.
A down start for the ASX, following a flat day: For what was a generally positive, albeit lukewarm lead from Wall Street overnight, SPI Futures are pointing to an 11-point drop for the ASX200 at today’s open. Trade was as flat as a tack yesterday, lifted only by a bounce in bank shares, partially (and arguably) due to a component in yesterday’s consumer sentiment data that suggested a shift in confidence towards the housing market. Otherwise, a stall in the astronomical rise in iron prices, and a pullback in oil prices, weighed somewhat on the market – though that dynamic may be due to change judging by last night’s commodity price action.
A clear-cut lead hard to find: Today’s trade on the ASX may well be judged in large part on how the market reacts to the prospect of an announced Federal election date. SPI Futures fell into that market’s close, suggesting that the story may hold some weight. Otherwise, in the Asian session today, Chinese CPI data is the key release for market participants and will again be judged on what it says about China’s consumer demand, and the prospects for further fiscal and monetary intervention by policy makers. Thematically, cross-market moves suggest that there exists a present appetite for growth and risk, even if that comes without remarkable conviction.
Written by Kyle Rodda - IG Australia
Waiting, waiting, waiting: Another uneventful night in global markets, traders have apparently occupied themselves positioning for the ramp-up in economic data in the next 24 hours. Equity indices pulled back in North America and Europe, as global safe-have bonds caught a bid. Commodities fell across the board, naturally with the exception of gold, which ticked higher on haven-demand. The G10 currency complex was lifeless, with the Japanese Yen edging higher as the carry trade was unwound on anti-risk sentiment. And in line with overnight trade, after a flat day yesterday, SPI Futures are indicating the ASX200 will drop 15 points come the open this morning.
IMF rubber-stamps growth outlook: The macro-event that caught most attention last night was the IMF’s anticipated downgrade to global growth. Given the loaded calendar from now until Friday, perhaps that update was an appropriate precursor to the litany of risk-events. As can be inferred from the description of overnight price action, the release wasn’t met with a great deal of surprise, reaction or volatility. However, the message was stark, and worth noting. In the wise-old-eyes of the IMF, global economic growth ought to slow down to 3.3 per cent in the year ahead – a revision lower of its previous estimate in January of 3.5 per cent.
Slow-down to be fleeting? Despite all their resources and soft power, the IMF told market participants something that they sort of already knew – and more importantly, had already priced-in. Higher trade barriers have sapped trade-flows and growth in emerging-markets. The consequences have flowed to developed economies – especially those of the European Union, which collectively will slow down to 1.3 per cent this year. For all this knowledge, risk assets remain supported. Maybe it’s this silver lining that’s keeping hope alive: although certainly below what its been in the past, forecasts suggest that the global economy will recover into the back end of 2019.
Bonds flashing amber signals: The growth picture beyond that is a little sketchy, though on-balance its probably not a positive one. It is a matter of debate as to what this all may mean in a contemporary context, but at least a recognition of what rates-markets may be suggesting about the longer-term growth outlook should be discounted. Yield curves across developed economies still portray an ugly kink in the 3-to-7-year sections, implying a marked economic slowdown, along with subsequent central bank policy intervention, the world over at around that time-period. Generally, market participants do seem cognizant of the fact, and are treating it with merit.
Make hay while the sun shines? But its material consequences aren’t yet being felt: it’s a case of make-hay-while the sun shines. And as far as risk assets go, the momentum on Wall Street Indices, and to a lesser extent the ASX200, can be somewhat attributed to this short-termism. Earnings growth prospects for the next quarter and next half are dim. Wall Street earnings season is practically upon us, and the series of revisions that have taken place since the start of 2019 has led to the consensus view earnings growth will have contracted by over 4 per cent; in Australia, earnings growth is expected to stagnate.
Earnings forecast to improve, eventually: However, the bigger picture view is that earnings growth will turnaround. And in no small part it seems, markets are banking on a central-bank engineered turnaround in the global economy before year end. More than just a fall in discount rates, the projected recovery in sales growth across the S&P500 speaks of a belief that demand can be sustained enough to keep delivering growth to US corporate’s top line. It’s here where the bulls and bears become divided: sure, a chase for yield and capital growth will support flows into equities, but is a lift an improvement in fundamentals really that likely?
The week to finally pick-up: It all rests on the fortunes and policymaking of the global economy’s triumvirate, of course: the US, Euro-zone and China. And the reason why the back-end of this week is significant is that key data is released out of all three that will illuminate whether markets are correct with their current bullish-view. The ECB meet this evening, with their thoughts on the continent’s short-term growth to be closely perused. US CPI and FOMC Minutes will be assessed in the context of confirming whether US interest rates will remain accommodative into the extended future. And Chinese CPI and trade balance will be carefully monitored when it arrives, too.
Written by Kyle Rodda - IG Australia
An uneventful day on Wall Street: A flat, somewhat mixed, and low activity day on Wall Street, market participants seem to be eyeing events later on in the week. After Friday’s Non-Farm Payroll induced rally, traders have apparently looked-down below their feet, realized how far this market has climbed, and decided a fresh-wind is required before scaling to new record-heights. Such a milestone stands only 1-and-a-half per cent away for the S&P500; and sensibly, the market is in no rush to get there. Generally, though, the chatter in the commentariat betrays an overall confidence that the S&P will get there. As has been said a-plenty before: market conditions are looking quite “Goldilocksy”. Only a little more fuel is required to propel US stocks to where bulls wish for them to be.
A backloaded economic calendar: The reasoning behind the lukewarm day on Wall Street overnight, aside from just being a Monday, is the economic calendar is backloaded this week. There seems to be a reluctance to get ahead of the data; with the preference being to position for it and react to it as it comes. US CPI data and FOMC Minutes will be the releases for US markets, and will, for the bulls, ideally confirm without qualification the Fed’s need to stay-put on interest rates. But Brexit-drama will also be closely monitored, as we creep ever-closer to the April 12 Brexit-deadline; as will the IMF’s economic updates due mid-week, and the ECB’s Monetary Policy meeting, for insights into the global growth outlook.
Currency traders positioning for event-risk: In contrast to stock-indices, shuffling in currency markets was more pronounced on the litany of macro-headline risk. The central thread to the moves was a fall in the US Dollar, though much of this move came as an extension of positioning in the Euro ahead of Wednesday’s ECB meeting, just as much as it was a positioning for CPI data and FOMC minutes. Growth appetite is generally higher, it must be said though, with commodity currencies, such as the AUD, NZD, CAD, and NOK rising – the latter two owing to a spike in oil prices – and safe havens like the Japanese Yen and Swiss Franc falling.
US earnings to determine Wall Street’s fate: Looking slightly higher above the fray, and US earnings season is coming-up, and may centre market-participants’ minds a touch. Not that any tremendous surprises are forecast; though earnings growth is expected to have softened a little this past quarter. That much won’t derail markets, and estimates are that a healthier growth in US corporate earnings should return as 2019 unfolds. Only the severest miss in earnings growth would curtail the recent bull-run across the S&P500. And not to mention that, with the US Fed keeping yields and discount rates low, the price-to-earnings ratio across the index remains relatively attractive, while dividend yields are also becoming of greater appeal, too.
ASX facing domestic headwinds: A similar dynamic could conceivably prevail across the ASX200 in time, though some headwinds might keep momentum subdued. The ASX is showing a high correlation with iron ore prices at-the-moment, as the materials sector underpins the market’s gains. Though welcomed, the rally in iron ore is on shaky ground, given its being driven by supply disruptions rather than global economic growth. There are other areas of upside in the index it must be said: namely in biotech, which has benefitted from the recent turnaround in risk-appetite. However, not to be forgotten, the uncertainty in Australia’s property keeps weighing on the financials sector; as is the global slipping in long-term bond yields, which is keeping upside financial stocks globally limited.
ASX in the day ahead: Nevertheless, looking just to the day ahead, and SPI Futures are indicating that the ASX200 will open around 8 points higher this morning. A clear indication of where the market might go today is missing currently. It comes on the back of a day which witnessed a very broad-based rally for Australian stocks. Lo-and-behold, it was another big rally in iron prices, and a slight lift in industrial metals generally, that underpinned a run-higher in mining stocks, and the overall ASX200. But breadth, too, was strong overall: 72 per cent of stocks were higher on the day, with the communications and financials sectors the only laggards for the session.
Oil price rally accelerating: One theme to follow today will be the renewed rally in oil prices to begin the week. Supply-side risks have led the price higher once again; this time, courtesy of internal political instability in Libya. Actual supply disruption is yet to be confirmed, making the spike in prices sensitive to rapid retracement. According to the daily RSI, while upside momentum remains strong, the market is flashing signs of being overbought. However, given the current geopolitical dynamics, ahead of key OPEC meetings this week, future production cuts from major oil producing countries is still being priced-in. The WTI futures curve went into backwardation overnight, reflecting the pricing-in of perceived oil undersupply in the medium term.
Please see the expected dividend adjustment figures for a number of our major indices for the week commencing 8 April 2019. If you have any queries or questions on this please let us know in the comments section below. For further information regarding dividend adjustments, and how they affect your positions, please take a look at the video.
NB: All dividend adjustments are forecasts and therefore speculative. A dividend adjustment is a cash neutral adjustment on your account. Special Divs are highlighted in orange.
Special dividends
Index
Bloomberg Code
Effective Date
Summary
Dividend Amount
AS51
SIQ AU
12/04/2019
Special Div
28.5714
As you know, constituent stocks of an index will periodically pay dividends to shareholders. When they do, the overall value of the index is affected, causing it to drop by a certain amount. Each week, we receive the forecast for the number of points any index is due to drop by, and we publish this for you. As dividends are scheduled, public events, it is important to remember that leveraged index traders can neither profit nor lose from such price movements.
How do dividend adjustments work?
This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.
A “Goldilocks” end to the week: Sentiment was nicely boosted to end the week last week. US Non-Farm Payrolls printed as closely to a so-called "goldilocks" figure for risk assets as you're ever liked to see. The data revealed the US economy added 196,000 jobs last month, against an expected figure of 172,000. It was enough to keep the unemployment rate to its very low levels of 3.8 per cent. But the real kicker for market-bulls was the earnings component: wage growth missed estimates, revealing a monthly increase of 0.1 per cent, versus expectations of a 0.3 per cent expansion. The result from the NFPs achieved two things: a reassurance that growth in the US economy, while possibly late cycle, is still solid; and inflationary pressures coming from higher wages remain subdued.
Risk appetite climbs: Equities and other risk barometers were the major beneficiaries of the "goldilocks" US labour market data. Cyclicals performed well on Wall Street, as the S&P500 sustained its focused climb towards record-highs. Credit spreads narrowed too, as yield was sort out in fixed income markets. The VIX fell into the 12 handle, as fears of a sharp and imminent economic slow-down abated. And US Treasury yields remained quite steady, as the likelihood of a Fed rate cut before the end of 2019 were unwound slightly. The dynamic has led to a great deal of positivity across global equities to begin the new week, with futures markets ubiquitously in the green.
Trade-talks tread water: The other major event over the weekend was US-China trade-talks, and unlike the NFPs release, the outcome (so far) has generally been met with a shrug. Markets are hearing much of the same from both sides on the trade-war at-the-moment. Progress is ostensibly being made -- that's what Larry Kudlow told the press over the weekend, and that's what Chinese President Xi Jinping told the press on Friday afternoon. But markets are a bit fed-up with platitudes: they've priced in amicability, and are now craving a decisive resolution, with an unwinding of tariffs. That could still come yet, of course. However, it wasn't to be this weekend; so markets continue to wait with bated breath for a true breakthrough.
Reshuffling in currency markets: The combination of strong NFPs and static trade-negotiations looks to have inspired a fall in growth currencies and a lift in the US Dollar over the weekend. Moves in foreign exchange markets were quite limited in the G10 space to end the week. The Australian Dollar has fallen back to the 0.7100 handle; while the Kiwi Dollar and Canadian Dollar have also pulled back - the latter falling despite a continued climb in oil prices. The Japanese Yen was down, however, revealing supported risk-appetite in the market currently; and the Euro was also down, much further into the 112 handle, as pessimism reigns about the Eurozone's economic prospects. Naturally, the Pound also dipped, unaided by heightened Brexit fears as the April 12 Brexit-deadline looms.
China’s gold-bugs: Speaking of the currency complex, Chinese foreign reserve data were released over the weekend, and revealed that the PBOC once again increased its gold reserves last month. The motivation for doing so is speculative, and probably multifaceted. Nevertheless, one large consideration from Chinese policymakers must be to reduce exposure to the US Dollar. In the face of geopolitical conflict, and a begrudging dependence on the US Dollar as global reserve currency, the PBOC joins a handful of global central bank's reducing dollar holdings, often in favour of gold. Though dollar pre-eminence ought to last for some time yet, China's gold-buying spree adds credence to the notion that the yellow metal may see more upside yet in the long term.
Trumponomics 2.0? Incidentally, perhaps evidence of the benefits of separating a national economy from US Dollar exposure came over the weekend. In the newest chapter of the Trumponomics handbook, the US President announced his desire to see the Fed undertake another round of Quantitative Easing to further fuel the US economy. Perhaps emboldened by (the perceived) success of forcing the Fed to halt rate hikes last year, the President has turned his power to force outright rate cuts. The President's rationale is easy to ascertain. But reading between the lines: given his desire to carry a strong economy into the 2020 Presidential campaign, might this outburst indicate the President's belief the US economy might soon slow down?
ASX to reclaim losses this morning: As far as Australian equities go today, the bullish lead handed to market participants should see the ASX200 climb about 32 points this morning. If realised, this will put a line under a couple of days of rather broad based selling on the Australian stock exchange. Seemingly marching to a beat separate from that of the rest of the world, the ASX200 registered noteworthy falls to end last week. It was a wholesale exit from Australian stocks, with every sector in the red on Friday, on 18 per cent breadth. The rationale isn't clear as to why this was so: market internals were quite balances, though momentum had arguably gotten a bit over down. Regardless, global bullishness should spark a rebound, ahead of another busy week for traders.
Written by Kyle Rodda - IG Australia
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.
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”.
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
The biggest day of the (economic) year: The Australian economy garnered significant attention yesterday. Arguably, it was the biggest day on the economic calendar we’ll see this year. Insights into both the future of monetary and fiscal policy don’t often come on the same day. But yesterday it did: the RBA delivered their monthly decision on Australian interest rates; and the Federal Government handed down its latest budget. The price action in financial markets has thus far been limited – though, granted, we wait for the ASX to open this morning to witness the stock market response to the budget. At least from a purely intellectual standpoint though, both events have given market-buffs enough to chew on, and potentially frame future trading opportunities.
The RBA stays away from politics: Let’s break it down and start with RBA. If there was ever a meeting the RBA wanted to avoid politicization, it was this one. Unlike what’s happening in the United States, our central bank has been generally insulated from political-ire in the post-truth, anti-establishment era. But surely Dr. Philip Lowe and his team have sharp memories and recall the impact the 25-basis point hike to interest rates in November 2007, weeks before a Federal Election, had on the political discourse. Considering that last night’s budget was just as much a re-election pitch as it was a document of economic management, keeping safely away from the fray was always on the cards for the RBA.
The economic rationale: And not for unwise economic reasons, either. All Australians know how the game works: an election year budget is a vote-buying budget. In principle, it’s the chance to buy-back the electorate after years of (ostensibly) tough-but-necessary decision making. For the boffins at the RBA, the timing of the situation couldn’t be better: provided it’s implemented responsibly, with the Australian economy in its current state, some meaningful fiscal stimulus from the government wouldn’t go astray. It takes the heat off the RBA, undoubtedly: ideally, the injection of money into the economy will jump-start domestic demand, and boost consumption at a time when households are doing it a little tougher than they have in the past.
Keeping the powder dry: It helps the RBA keep their powder dry, too. They have 1.50 per cent of potential cuts if things turn sour in the economy to play with, so to speak, before, like some of the world’s other major central banks, they would have to experiment with some unconventional monetary policies. Not only that, but unlike some of the more fiscally irresponsible governments around the world, the Australian government, with relatively low levels of debt, can still afford to pull some fiscal levers. This desire to wait-and-see shone through in yesterday’s RBA statement. They certainly took a more balanced view to economic risks, but they shied away from taking the line that rate cuts may soon prove necessary.
Picking up the slack: The benefit of this is that rather than just drop interest rates, and risk inflating (certain) asset prices and encourage the accumulation of private debt, targeted spending may add the necessary sugar-hit to revitalize households and their consumption. This is important to the RBA: there are three things really weighing on consumers at present: high-levels of private debt, a fall in house prices, and low wages growth. Now, a touch of fiscal stimulus won’t reverse these challenges in-and-of-itself; and the RBA will need to remain active in managing risks relating to all three. However, the hope is that a quick boost to government spending could do its part to ease the pressures, and perhaps unleash the economy’s animal spirits.
Forever the lucky country: Now, some of the structural or cyclical factors, from a global economic perspective, will remain unchanged. And that is what is often glazed over or ignore when it comes to Australian economic policy. The pollies will claim it’s an act of volition, but Australia is a small and open economy, and without good-luck, like what’s recently been seen in with our terms of trade, the money would not exist to support tax cuts and infrastructure spending. The problem for the RBA and Federal government, is sluggish wage growth (the thing that both parties are banking on turning around to maintain surpluses and stable monetary policy) is being caused by phenomena outside their control.
A day for a little judgement: The interesting part of today’s trade is that market participants get a little sample of what the market is think about the combination of yesterday’s RBA meeting and Federal Budget. SPI Futures are indicating a big jump for the ASX200, despite a lukewarm night on global markets. First and foremost, in response to the RBA, the Australian Dollar has fallen with rate expectations and bond yields, as inflation expectations are deferred. Reactions to the budget will probably have to be judged by the behaviour of the ASX, though: consumer stocks outperformed yesterday, in a possible by-the-rumour sell the fact scenario. All of this will unfold around the release of important Retail Sales numbers today, which will give a true update on Aussie-consumers.
Today was a good day: The term risk-on can be a little overused in financial markets at times. When short-on-time, and confronted with something complex, suggesting it’s been a “risk-on” or “risk-day” is a simple way to say market participants feel pretty good. At the risk of oversimplifying: the first day of the new quarter was certainly a “risk-on” day. It’s likely given the context of yesterday’s trade that makes this so. Concerns about a global economic slowdown have been their most sensitive in years. So: to receive a handful of better than expected economic data, such as we did in the last 24 hours, it makes things in the whole appear much better than if they were to be judged just in the particular.
The story has changed (for now): It’s probably a part of that compulsion market participants have – pundits especially – to infer a trend from a tiny-bit of information. The justification is reasonable enough: most people understand the world through stories, rather than hard-data and analysis. To take a piece of information, infer a trend, and then tell a story with it is far more comprehensive (and saleable) than just enumerating some soul-less facts. It’s with this (partial) assumption in mind, the first day of the new week, month and quarter can be viewed. For all its intricacies, complexities and ambiguities, it was the most “risk-on” day we’ve seen in a short-while; and the hope is now that this is the beginning of a significant reversal in trend.
The truisms hold: Maybe another reason why dubbing price action yesterday this way is that it lived-up to so many old market axioms. Ironically enough, in these situations, the coming-true of absolute, self-evident truths about the world are comparatively rare. More-often than not, it’s more common to find an exception to the rule than to observe clear evidence for the rule itself. But truly yesterday, all but a few of the hackneyed judgements about markets materialized. Stocks ubiquitously rallied, with the S&P500 eyeing new highs. Bond yields are recovering ground after their recent tumbles. Commodities were generally higher, though (of course) gold was down. And growth currencies rallied, with the Japanese Yen leading the G10 laggards.
The focus on China and America: A little description, a re-cap if you will, of the data that drove this price action is definitely warranted. And here, this could be evidence of market participants’ collective desire to simplify and cherry-pick information. Markets were swept up in the hope and positivity of a series of PMI releases on Monday. There were many of them released, amongst other high-impact economic data. However, two stood out as the drivers of risk-sentiment. The most important was Chinese Caixin PMI numbers, which validated the weekend’s “official” figures, and showed an expansionary print in that metric. The second most was US ISM PMI numbers, which delivered a robust print itself, beating economists consensus forecasts, too.
Counter-evidence ignored: The narrative formed out of this couple of economic releases was relatively simple: two forward looking indicators for the world’s two biggest economies came-out strong; growth in the global economy therefore could be stabilizing. This general mode of thinking overnight inspired the so-called “risk-on” day; and proved cogent enough for other contradictory data to be ignored. Because all-in-all, the balance of data released – the first lot in a mountain of data to be released this week – was probably fairly mixed. European PMI numbers and CPI figures were printed, and dramatically underwhelmed again; while US Retail Sales figures greatly undershot forecasts, conveying a contraction in consumption in the US last month.
Australia to follow the leader: Nevertheless, unsurprisingly, the ASX200 appears set to follow the risk-on theme this morning and jump in excess of 30 points at today’s open. It’s going be a massive day for Australian-econ-watchers; and may market participants too. Quite reasonably, it could be argued that, on paper, it’s the biggest day of Australia’s financial-year. This afternoon we get the RBA’s monthly meeting, at which the central bank will most certainly be keeping interest rates on hold. Then tonight, in what could prove a pre-election manifesto from the Coalition Government, the annual Federal Budget is presented before Parliament, with the prevailing view being that it will be loaded with spending and other sweeteners to win-over members of the electorate.
Framing the day: As far as the RBA goes, the key point to watch for is whether, following the RBNZ last week, the central bank makes a decisive dovish pivot in its outlook for Australian interest rates. That is: it falls in line with market expectations and adopts a rate-cutting bias. When it comes to the Federal budget, it will be judged by what extent proposed spending measures will help stimulate a softening domestic economy. The Australian economic outlook has remained reasonably strong lately is an improvement in the terms of trade, led by a fortuitous climb in commodity prices. Tonight’s budget will be judged by how the income from that phenomenon is redistributed to households, to reboot ailing domestic consumption.
Expected index adjustments
Please see the expected dividend adjustment figures for a number of our major indices for the week commencing 25 Mar 2019. If you have any queries or questions on this please let us know in the comments section below. For further information regarding dividend adjustments, and how they affect your positions, please take a look at the video.
NB: All dividend adjustments are forecasts and therefore speculative. A dividend adjustment is a cash neutral adjustment on your account. Special Divs are highlighted in orange.
Special dividends
Index
Bloomberg Code
Effective Date
Summary
Dividend Amount
UKX
RBS LN
21/03/2019
Special Div
7.5
AS51
FLT AU
21/03/2019
Special Div
212.8571
HSI
27 HK
25/03/2019
Special Div
45
RTY
JILL US
18/03/2019
Special Div
115
RTY
WSBF US
20/03/2019
Special Div
50
As you know, constituent stocks of an index will periodically pay dividends to shareholders. When they do, the overall value of the index is affected, causing it to drop by a certain amount. Each week, we receive the forecast for the number of points any index is due to drop by, and we publish this for you. As dividends are scheduled, public events, it is important to remember that leveraged index traders can neither profit nor lose from such price movements.
How do dividend adjustments work?
This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.
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.
Expected index adjustments
Please see the expected dividend adjustment figures for a number of our major indices for the week commencing 1 April 2019. If you have any queries or questions on this please let us know in the comments section below. For further information regarding dividend adjustments, and how they affect your positions, please take a look at the video.
NB: All dividend adjustments are forecasts and therefore speculative. A dividend adjustment is a cash neutral adjustment on your account. Special Divs are highlighted in orange.
Special dividends
Index
Bloomberg Code
Effective Date
Summary
Dividend Amount
AS51
SUN AU
1/04/2019
Special Div
11.4286
AS51
ABC AU
2/04/2019
Special Div
5.7143
As you know, constituent stocks of an index will periodically pay dividends to shareholders. When they do, the overall value of the index is affected, causing it to drop by a certain amount. Each week, we receive the forecast for the number of points any index is due to drop by, and we publish this for you. As dividends are scheduled, public events, it is important to remember that leveraged index traders can neither profit nor lose from such price movements.
How do dividend adjustments work?
This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.
Relief-on? It’s a trifle difficult to describe last night’s trade simply. On the surface, risk assets are being reasonably well supported, and there are a few signals suggesting market participants are in a slightly more bullish state of mind. Rather than “risk-on” however, one might describe the last 12 hours in markets as “relief-on”. This is mostly due to the fact that, at least for now, the global bond market rally has stalled. Markets had worked themselves into a frenzy this week, fretting over the meaning and implications of the precipitous run-higher in safe-haven government debt. It sparked all sorts of repositioning and knee-**** activity in markets, pulling price action around its massive gravity, and inspiring a general anti-risk sentiment.
It’s been the speed, not the direction: The shocking part of the bond market rally – and let’s recall, for the many folk out there who aren’t bond-market buffs, that when bond prices rally, bond yields ¬fall – is not that it is necessarily happening at all. Instead, it is a matter of how quickly it is all happening, and what this rapid shift in momentum means all-in-all. The more benign reasoning is that it’s a basic repositioning, accelerated by technical factors, in response to the dovish turn central bankers have adopted lately across the globe. The direr interpretation, however, was that the swift shift in bond pricing signalled a market pricing in a major economic slow-down, maybe even a recession, in the global economy.
Markets getting ahead of themselves: Both narratives are interrelated and true to some extent. Interest rates expectations have been sliced-down very quickly recently, courtesy of course, to a marked deterioration in global economic growth conditions. But these things take time: hence, the move in bonds seem disproportionate. This isn’t an invitation to rejoice, by any means. Risks in the long term to the global economic outlook are ample, especially as it relates to Chinese and European growth. But to throw in the towel now on global macro-economic outlook would be premature, and potentially wasteful: the actions of central banks are skewing risk-reward in favour of the risk takers, meaning taking a long bias on certain equity indices ought not to be discounted.
The risk-reward balance: A skerrick of this view manifested in market activity last night. Wall Street is up and trending higher, just on an intraday basis, into the close. Most certainly, the fall in bond yields, driven by the prospect of looser monetary policy across the globe, is attracting flows into stocks. It's a continuation of the perennial battle in financial markets: the desire to take risk when financial conditions dictate its attractive to do so, versus the desire to preserve capital when the economic growth environment is degrading. Policy makers are fighting hard to engender a confidence that the former can be trusted and will lead to an improvement in the latter.
Premier Li’s words fire-up traders: Yesterday, and the turnaround in sentiment began here, it was China's policy makers turn to try and settle market participants' nerves. In a speech at the Boao forum, Chinese Premier Li Keqiang outlined his optimistic vision for his nation and stated his belief that the fundamentals of China's economy were inherently sound. He did express that stimulatory measures would be undertaken to address any temporary underperformance in the economy, though avoided pledging major monetary support. However, Premier Li made clear, seemingly in an appeal to his peoples' patriotic fervour and market participants animal spirits, that China's economy is not because of internal problems, but problems that pertain to weakness in the outside world.
It’s not us, it’s them: It's a popular strategy at-the-moment amongst financial leaders, actually: when having to explain what's causing domestic problems, just blame someone else! It was manifest in Premier Li's speech yesterday. But it was also a feature of ECB President Mario Draghi's recent discussions to the market, as well as that of Fed Chair Jerome Powell. The global economy as we know it is very interconnected, so in some sense there is a kernel of truth in stating that weak economic fundamentals is a function of some external factor. But when the centre of the argument is essentially to just point at the other guy, it comes across less as policy discourse, but more as a Three Stooges ****.
The end of the month: The positivity inspired by Premier Li’s rallying call looks to have been discounted in the ASX200 yesterday. SPI Futures are pointing only to a very small gain at the open today. High impact news is hard to come by today – a lot of the event risk is loaded into next week now. Brexit drama will maintain relevance, but its impact will be contained to (a presently depreciating) Pound. The stronger greenback is a minor theme to follow: despite weaker US GDP figures, the almighty Dollar has smashed the currency complex and gold prices. To tie everything back into rates and fixed income: we wait to see whether AGBs sell-off too, and whether bets of RBA cuts are tempered, too.
Written by Kyle Rodda - IG Australia
The see-sawing market: The one-day-up, one-day-down pattern of trade on Wall Street continues. It’s playing-out so elegantly, it’s almost absurd. Yesterday was a “down” day, as market participants evacuated equity markets to seek shelter in safe-haven government bonds. In contrast to the day prior, breadth has been universally low, with practically every sector in the S&P500 trading lower. The same simple binary that’s driven market activity for weeks is behind this dynamic: a competition between fears regarding the slowing global growth outlook, and the appeal of risk taking in a financial market environment plagues by tumbling yields. The pattern is showing few signs of abating and speaks of a market that is consolidating before a clearer-cut direction is formed.
Asia set for mixed trade again: Wall Street’s lead is manifesting as a mixed-picture for Asian markets today, according to futures. Provided this materializes, it will be an extension of the region’s equities own theme. Yesterday’s trade was tepid for Asia too, resulting in an ultimately flat day for the ASX200, a solid day for Chinese and Hong Kong markets, and soft day for the Nikkei. As it presently trades, SPI Futures are suggesting that the ASX200 will open slightly lower this morning, if not flat; as will the Hang Seng and Nikkei; but the CSI300 ought to open a touch higher – though this is based on a future’s price that reflects price action from yesterday evening’s trade.
Clutching for clarity: Given the overall soft-day for Wall Street stocks, combined with what’s expected to be a more-or-less flat start for the ASX200, the themes to follow for the day are currently a little obscure. After a stabilization in bond yields in the day prior’s trade, the financials sector kept the ASX200 in the green yesterday. For one, it’s an upside-drive that may go missing today, as global financials stocks pullback courtesy of another tumble in yields. Iron ore prices are down, but industrial metals are collectively higher, implying the macro-picture won’t be the key determinant behind the material’s sector trade today. Oil prices are also lower after a bigger than expected build in US crude inventories, boding poorly for energy stocks.
Markets’ missing momentum: The defensive sectors may have another day in the sun instead. After the aforementioned bounce in bond yields, utilities were the laggard in yesterday’s trade, trading 1.34 per cent lower on 0 per cent breadth. Nevertheless, even some intraday rotation within the ASX200 will give little catalyst to spark a run higher in the index. Like many stock indices the world-over presently, the market has become mired by slowing momentum. Market internals haven’t been over-stretched by a great measure of late, but right now, they are showing a market missing real enthusiastic sentiment. It could mean a pause, before another run, or a brief pullback is coming. Positioning according to the pull/call ratio is neutral, however trending lower.
Weaker AUD supporting stocks: One saving grace for the ASX200 is the weaker Australian Dollar, which took another dive yesterday. Having crept higher in recent weeks, the AUD was floored yesterday, after the RBNZ, during their monetary policy meeting, took a much more dovish stance than expected. They stated their expectation that their next move would be to cut rates. The Kiwi-Dollar got flogged and the Aussie-Dollar chased it lower, as markets not only increased bets of an imminent interest rate cut from the RBNZ, but also the RBA. The dive in the currency was ultimately the key driver of the modest gain registered by the ASX200 yesterday: and once again may be required today to see further short-term upside for the index.
What it sounds like when doves cry: The RBNZ joining the growing party of central bank speakers talking-down economic prospects was the likely cause of yesterday’s run into government bonds. That, as well as a speech from ECB President Mario Draghi, in which he expressed his pessimism about hitting that central bank’s inflation target. German Bund yields swan-dived last night consequently, with the 10 Year Bund yield falling to -0.08 per cent – below that of its JGB equivalent for the first time in several years. US 10 Year Treasuries fell again below the Federal Funds rate at 2.4 per cent, as markets price in nearly 1-and-a-half interest rate cuts from the US Federal Reserve before January 2020.
May maybe about to call it a day: The Sterling proved resistant to this tide in the G10 currency complex overnight, trading on further Brexit developments instead. The Cable climbed on news that UK PM Theresa May would tender her resignation once Brexit was decided. This in and of itself didn't inspire the rally in the Pound. Rather it was the more conservative wing of the Tory party's response to it that bolstered sentiment. Reportedly, they've shifted their support towards favouring the PM's deal, on the basis she'll abdicate here position upon its passing. Traders are pricing in now an increased chance of a breakthrough in Brexit negotiations, that will ensure that an orderly enough Brexit will transpire before the April 12 deadline.
Written by Kyle Rodda - IG Australia
Broad-based based bounce in stocks: It was a buy the dip day yesterday, judging by price action in global risk-assets. As has been the theme this week, there wasn’t any meaningful macro-news to change market participants behavior. So: an explanation for the (almost) universally solid day for global equities ought to be chalked-up to internal market mechanics. What this may imply for the longer run is a touch obscure. This market is trading much in the way a plane rights-itself after some brief, but heavy turbulence. Some rough times must surely lie ahead once again, if not for the simple matter that fundamentals haven’t changed. Market participants will therefore remain glued to any developments that may reveal new truths about global growth.
Very little “new” news: There weren’t any such stories out last night. Outside the echoes of last week’s dovish Fed-tilt, European growth concerns, and talk of inverted yield curves, voices portending doom in financial markets were apparently much quieter. Ever the experts in hindsight, the collective wisdom of market participants seemed more interested in rationalizing away their previously held fears. This could be justified, and at that, telling in and of itself: traders are searching for reason to keep taking risks, and maintaining a bullish temperament. It certainly showed; not just in equities, but other asset classes. Bond yields climbed, at least momentarily ending their rout, and growth-proxy currencies lifted as currency traders sold-out of the popular safe havens.
US sector map totally green: A criticism levelled at this market is that it’s so preoccupied with macro that it lacks any level of true discernment. Capital is being allocated into equities as a total asset class, ignoring the differing prospects of the varied sectors within equity markets. Case in point, just last night, was the S&P500, which has rallied across the board, on 81 per cent breadth. Of course, different sectors have benefitted more than others, with energy and financials leading the charge, and consumer discretionary and communications trailing the pack. But the general dynamic is clear: no matter where you look, when risk taking is being encouraged by a ubiquitous fall in global bond yields, flows go into equities of all stripes.
A desire for growth and yield? This behaviour might be best conveyed by the juxtaposing of US tech's recent performance with the US utility sector. It gives a good read on the growth-versus-value dichotomy in equity allocation. On the whole, they've each performed remarkably well in recently -- a phenomenon which, generally, ought not to occur, as market participants either prioritise capital growth or yield. Once again, the catalyst behind this behaviour is probably attributable to fall in global interest rate expectations, as the world's biggest central bank's step away from tightening financial conditions. In short: lower yields in safe assets is fostering a simultaneous search for income from the conservative types, and an excuse to take bigger risks for the more daring types.
Something has to give: The problem is: the finitude of capital, plus changes in momentum in the market, all but necessitates market behaviour fall one way or the other. And this is where global growth prospects, and it's knock-on implications for earnings, become crucial. A fundamental case to bet big on growth stocks disintegrates when the global economic outlook shows signs of deteriorating. As such, market participants, though not acting on their impulse today, are sticking their fingers in the air to forecast which way the frosty-winds of the global economy are going. For the medium term, the conclusions aren't so good, and that's laying the bedrock for potentially choppy trade as traders attempt to fill the blanks of several prevailing uncertainties.
Markets hoping for a growth turnaround: But faith is being maintained that central banks may pull a rabbit from the hat and reverse course enough to put equity markets back into a steady, upward trajectory. Amidst no change in fundamentals, judging by yesterday's bounce in global equites, there are enough buyers in the market to take that punt. Apart of the matter, too, is that market participants are being given little choice but to chase risk. The fall in discount rates is luring them into taking on greater risk to achieve their required returns. Hence, even while the slimmest of opportunities exist in the market, until a categorical move towards capital preservation emerges, flow will be sustained and supportive of global equities.
ASX demonstrating less optimism: As it relates to the ASX200, some late buying on Wall Street has translated into SPI Futures pricing in a flat start for the index today. Early indications are that Australian stocks will go without the broad-based buying that drove Wall Street activity overnight. The slightly stronger Australian Dollar and lift in bond yields will also enervate the market, given much of its recent gains has come courtesy of a fall in both. Energy stocks could be the clear winner today, as oil prices leap to 3-month highs. The overall success of the market probably rests on the financials though. The question is whether a rebound in global yields will override the domestic challenges confronting the financial sector.
Written by Kyle Rodda - IG Australia
Markets trade-off Friday overhang: Markets traded in something of a vacuum Monday. The themes driving price action were more-or-less those that had determined activity to end last week. The effects of this were pronounced in the Asian session, but much less so in Europe and North America. It stands to reason: Asian markets were still to digest Friday night’s abysmal European PMI figures. That data’s impact is still rippling through the market. Anxieties about global growth and the likelihood for a global recession is the topic of the day. But the material losses stemming from these concerns, though broad-based, have been limited overnight. Wall Street is down but bouncing; European stocks were down; while futures contracts for Asian markets are mixed.
Risk-off generally prevails: Fear is demonstrably higher. On balance, safety was generally sought on Monday. In something of a bittersweet development, the VIX has pulled of its lows, to trade above 16, as traders reprice volatility and risk. In the broader G10 currency complex, the Yen has been led the pack, though its rally has steadied, and it is currently shuffling around the 110-handle. Investment grade credit spreads have widened notably, as speculation about slower growth has fanned-fear regarding the massive US corporate debt burden. And finally, the overnight-drop in the US Dollar, combined with the ubiquitous disappearance of safe-yielding assets the world-over, has pushed gold prices to $US1322 per ounce.
Sentiment balances out slightly: A sliver of relief made its way into market participants psyche overnight. Some positive German data helped traders decompress – the bears were made to take a backwards step. Perhaps fortunately for the bulls in hindsight, the lack of major data releases removed the risk of fuel being added to the fire of bearish sentiment yesterday. The business-media cycle primarily concerned itself with interpreting the meaning of an inversion in the yield curve between the 3-year and 10-year US Treasury note. The conclusion sensibly arrived at, after making it through the hysterical headlines, is that no one piece of information tells the whole story; and even if it did, this ****-bit suggests (historically) a recession is still over a year away.
Global growth to remain central question for now: This isn’t to suggest that the global growth outlook ought not to be taken as a big-risk presently. It is, and it’s being digested by market participants meticulously. Naturally, equities aren’t showing it that much, but the unfolding dynamic in bond markets, which has recently seen global yields tumble to multi-year lows, is still in motion. The momentum behind this move diminished slightly last night, leading some to call for a bit of a snap-back in the very short term. However, the trend is firmly in place: yields are falling the world over as traders position themselves for the combined effects of a deterioration in economic activity, and subsequent interest rate cuts from the world’s biggest central banks.
Australian bonds rally: Such an appetite for relatively safe bonds manifested in our own markets, too. There was a sale of 5 Year AGBs, and the demand for the asset conveyed market participants desire for capital preservation. The bid-to-cover ratio out of the auction was a significant 5.61. Aussie bonds have, in a world where government debt is outperforming short term, seen some of the greatest in-flows of late. Catching-up with risk-off sentiment that had plagued markets, yields on AGBs tumbled during yesterday’s trade. Most noteworthy was the activity in the 10 Year security: it’s yield fell nearly 8 seven basis points to a record low 1.77 per cent.
Australian Dollar: resilience and a little luck: Despite the fall in yields on Australian Dollar denominated bonds, at least in the last 24 hours, the Australian Dollar has made its way modestly higher. The “little battler” as its affectionately known has lived up to its reputation recently, managing to hold itself above the 0.7000 handle, even in light of the mounting risk to global economic activity. The primary reasoning behind this has been twofold. First, the yield spread between US Treasuries and AGBs has actually narrowed, as traders price in a US economy increasingly inhibited by the slowdown in global economic growth. Second, the (perhaps) fortuitous lift in iron ore prices, courtesy of persistent fears about production and supply of that commodity.
Defensive sectors loom as potential leaders: It’s unlikely that plain luck will keep the ASX200 sustained. A settling of fundamentals is required for that to be achieved. That’s problematic, too: given the dearth of information the world over, the ASX will be reaching for global leads to add to its recent gains. Just for today: SPI Futures are indicating that the ASX200 will open about 8 points higher, as Wall Street stages a quick dash higher into its close. The bulls will be hoping for a bounce today, but judging by US markets’ lead, it’s a bit tough to see where that may come from. A defensive rotation was at play in the S&P500, so chances are a play into yield stocks will be the theme today.
Written by Kyle Rodda - IG Australia
Global growth the primary issue right now: The monumental tug-of war between improving financial conditions and deteriorating economic conditions continues. On Friday, it was the latter that took home the points, if only this time around. Both variables truly sit diametrically opposed, and as far as market participants are concerned, which force will prevail remains speculative. It’s written into the mixed-messages markets have been signalling in the last several weeks. It must be said, with the end of last week’s trade, such discrepancies are becoming less pronounced. The dominating concern pertains to the outlook for global economic growth. The world economy’s health is looking worse than previously imagined, and the re-introduction of dovish rhetoric from global central bankers is proving an inadequate remedy.
European growth (seemingly) imploding: A crumbling of European economic growth prospects is at the epicentre of concerns. European PMI numbers were released on Friday night, and they were shocking. As has been the trend of late, the services element of the data releases were respectable enough. But manufacturing PMI in Europe is falling off a cliff and has dropped well into “contractionary” territory. Most troubling, is that the core of this is apparently being driven by weakness in Europe’s power-house economy, Germany. Remembering 50 is a neutral print when it comes to PMI data: German Manufacturing PMI printed a woeful 44.7. It’s a reminder that with all the risks plaguing the global economy from East-to-West, its Europe that’s stuck in the middle of it all.
A return to a negative-yield world: The consequences of the bad PMI numbers were immediate and explicit. The yield on 10 Year German Bunds raced to its ignominious and long-awaited milestone, cracking into negative yield for the first time since mid-2016. If there is any evidence necessary that the global economy is at the end of a cycle, it’s that ****-bit of information. The rush into government bonds on Friday was ubiquitous, however, and has created some worrying price action. Conspicuously, the rush into US Treasuries has put the yield US 10 Year Treasuries to just above the current US OCR at 2.40 per cent. Furthermore, Japanese Bond Yields have travelled further into negative territory itself, with the 10 Year JGB yielding -0.08 per cent.
Currency traders seek-out JPY and USD: Reactions in currency markets have been somewhat predictable. The Euro has been slapped down below the 1.13 handle, as traders seek their safety primarily in the Japanese Yen, but also the US Dollar. The Greenback spiked to end last week, edging once more well into the 96 handle, according to the DXY. The CAD, NZD and Australian Dollar are also down, however perhaps not by as much as circumstances ought to dictate. The Scandi currencies are also mixed because of Europe's woes, as is the Swiss Franc, despite its status as safe-haven. And even in the face of US Dollar strength, the growing list of safe-securities delivering negative yield has supported the appeal of Gold, which is fetching $1315 per ounce.
Rate cuts being priced-in across the globe: The falling yield environment is, of course, being driven by a pricing-in interest rate cuts in developed economies the world-over. Though directly caught in the fray on this occasion, as far as the disappointing data goes, the materialising prospecting of weak global demand has seen traders boost their bets on a US rate cut in the next 12 months. The implied probability of a cut from the US Federal Reserve by January next year leapt to almost 80 per cent. The price action has led to a disturbing event in rates markets: the spread between 3 Year and 10 Year Treasuries has fallen to 0 basis points, inverting the yield curve between those two maturities.
Recession risk considered to be higher: Although not an infallible indicator, such a signal is often cited as portending a recession in the not-too-distant future. It might be for this reason that despite the pricing in on Friday of more activist central bank's globally, equities were generally thumped. The S&P500 was down 1.90 per cent, dragged lower by stocks in the US tech-sector. Of maybe greater concern was the more domestic growth sensitive, small-cap Russell 2000 index: it fell by quite a remarkable 3.62 per cent on Friday. This lead sets up the Asian region for a tough start to the week. SPI Futures are indicating the ASX200 will clock a 50-point loss at the opening this morning.
Trump and May to seize focus today: Unfortunately, too, the economic calendar today and (relatively speaking) the rest of the week, is looking quite empty. Inferring from what was dominating the financial press over the weekend, it will be politics on both sides of the Atlantic that will capture attention. Brexit rolls on, and volatility in the Pound is expected to rise as noises about UK PM Theresa May's leadership rises to a cacophony. And out this morning: early days, but Robert Mueller's report on collusion between the campaign team of US President Trump and the Russian Government during the 2016 US Presidential has found no conclusive evidence to support that allegation.
Written by Kyle Rodda - IG Australia
Market action proves it again: this market hinges on the Fed: The US Fed has proven itself as the most important game in town for traders. The FOMC met this morning, and lo-and-behold: the dovish Fed has proven more dovish than previously thought; the patient Fed has proven more patient that previously thought. Interest rates have remained on hold, but everyone knew that was to be the case today. It was about the dot-plots, the neutral-rate, the economic projections, and the balance sheet run-off. On all accounts, the Fed has downgraded their views on the outlook. And boy, have markets responded. The S&P500 has proven its major-sensitivity to FOMC policy and whipsawed alongside a fall in US Treasury yields, as traders price-in rate cuts from the Fed in the future.
The US Dollar sends some asset classes into a tizz: The US Dollar has tumbled across the board consequently, pushing gold prices higher. The Australian Dollar, even for all its current unattractiveness, has burst higher, to be trading back toward the 0.7150 mark. Commodity prices, especially those of thriving industrial metals, have also rallied courtesy of the weaker greenback. Emerging market currencies are collectively stronger, too. This is all coming because traders are more-or-less betting that the Fed is at the end of its hiking cycle, and financial conditions will not be constricted by policy-maker intervention. Relatively cheap money will continue to flow, as yields remain depressed, and allow for the (sometimes wonton) risk-taking conditions that markets have grown used to in the past decade.
Some risk being taken again, though somewhat nervously: The play into risk-assets makes everything sound quite rosy. There are caveats to this, however. And that relates to what’s been inferred about global growth from the Fed’s meeting this morning. Implicitly, at the very least, the Fed has acknowledged that growth in the US and world economy is all but certain to slow-down. It wasn’t said outright – a central banker would never want to be anything less than cautiously optimistic – but the tone of Fed Chair Powell at his presser suggests a Fed that is sufficiently concerned about the global economy that they will definitively reverse its policy “normalization” course. Positivity was maintained by the Fed about US economic conditions, outrightly. However, the market has read between the lines, and it doesn’t like what it sees.
Interest rates are now expected to be on hold for this cycle: So: although swung around post release, the more important bond market is telling a clearer story. The yield on the US 10 Year Treasuries have tumbled nearly 8 points to 2.53 percent, and the yield on US 2 Year Treasuries has fallen 7 points to 2.39 per cent. More remarkably, the yield on Treasuries with 3, 5- and 7-year maturities have dropped over nine points, creating a yield curve with a very flat belly. Of most concern here is that all of these securities are trading just at, or well below, the Fed’s current effective overnight-cash-rate of 2.40 per cent. Traders are now pricing in a greater than 50 per cent chance the Fed will cut rates by early next year, on the basis of deteriorating economic conditions.
It’s getting harder for the Fed to get the right balance: The tight rope is getting narrower. For market participants, as always: on one side of it sits the need for accommodative financial conditions, on the other the need for robust growth conditions. It’s the rudimentary in principle, though complicated in practice, interplay between the credit cycle and the business cycle. Out of this Fed meeting, the proverbial tight rope walker is nervously shifting her gaze down towards the economic growth outlook. Powell and his team have apparently not struck the necessary equilibrium in its approach to its policy and communications to the market. Yes (again), risk assets have rallied, but right now, not in such a way that suggests the bulls are significantly more confident in the investment environment being planted before them.
Other stories also important, though not as much as the Fed: Some of this could be attributed to the overhang coming from some of the other significant economic stories yesterday. Sentiment has been dented by news that key EU figure Donald Tusk may demand that no Brexit extension is granted for the UK; it has also been liver-punched by a story suggesting US President Trump does not necessarily see a lifting of tariffs on China occurring in any US-Sino trade deal. Once more: it does appear that markets have seen the greatest gravitas in the Fed meeting, though. And traders’ nervousness is being betrayed by this: despite a dovish tact, corporate credit spreads have rallied, the VIX is off its multi-year lows, and US Break-evens are revealing greater inflation risk in the US economy.
Australian markets to be defined by Fed and employment numbers: Fittingly, SPI Futures are suggesting the ASX200 will open somewhere between 5-and-10 points lower this morning. Speaking of markets and the growth outlook, not only will Australian trade be impacted by the fall-out from the Fed’s nervously dovish tilt, we also get some highly anticipated employment figures out this morning. The currency and rates markets will be what to watch for: the themes driving the ASX200 this week is the renewed push in iron ore prices, along with the rotation into yield-driven defensive sectors as Australian ACGB yields tumble. The RBA have hitched their hopes for the Australian economy on a tightening labour market and subsequent lift in wages growth and inflation. Watch therefore today for any major downside miss in employment numbers.
Written by Kyle Rodda - IG Australia
Another trade-war headline downs sentiment: There’s some news floating through the wires that sentiment has taken a hit overnight courtesy of some unfavourable trade-war headlines. It’s been reported that Chinese officials aren’t co-operating with their US counterparts, as it applies to certain sensitive elements of trade-negotiations. The S&P500, which had been developing some intraday momentum prior to the release, has retraced throughout trade, consequent to the news. It’s closed flat for the day, but despite this fall, moves in rates and bond markets suggest the fundamentals currently remain the same. The all-important balance between financial conditions and growth expectations is still there, ultimately supporting the bullishly inclined, as markets now prepare for tomorrow morning’s meeting of the US Federal Reserve.
The unresolvable issues: It’s perhaps an assumption alone, but the (very vague) report leaked to the market about trade negotiations surely pertains to one of the well-understood, seemingly intractable issues embroiling the US and China. Those, at its core, unrelated to economics, but to strategic, and somewhat philosophical differences. These are intellectual property theft, currency manipulation, and Chinese military posturing in the Asian region – especially the South China Sea. These differences are relevant because they boil down to brutal power-politics, and an essential clash of ideologies. This isn’t to suggest a trade-deal, and future bilateral cooperation can’t exist between both parties; but that whatever deal is struck, it’s unlikely to put an end to geopolitical tensions.
A trade-deal is still expected: Overall, the short-term economic stress placed on the US and (especially) China will probably force both countries to arrive at some sort of deal, eventually. Markets will benefit from that – and in a sense, they have already priced that outcome in. Industrial metals are the possibly the best harbinger of this: Dr. Copper, amongst others, still looks poised for upside. Assuming this to be so, the question likely to be asked is something like: “what’s next after a trade deal?”. This is where a degree of doubt creeps into analysts minds. It appears unlikely a satisfactory, elegant agreement will be struck between the US and China on this front. There’s too many zero-sum games; with rudimentary differences in world-view making co-operation complicated.
Power-politics won’t stop with a deal: The desire of one state to take a greater share of a finite amount of power is quite comprehensible to most. The behaviour is primal – an instinct everyone and everything seemingly possesses in some way. It manifests between individuals, just as much as it does between groups and nation states. Market participants generally understand this, and factor this in to their views. What seems to be missed sometimes is how inherently different perceptions of the world, when analysing the outward expression of power-politics, exacerbates conflict between nation-states. As market participants, though justifiably not the greatest priority, an appreciation of this dynamic is required, if nothing else to build an accurate view on how market activity may evolve.
A fundamental difference in philosophy: In the instance of the US-China conflict, some liberal, America ideals disagree with some collectivist, Chinese ideals. In the West, we tend to project our cultural motives onto China, and infer meaning from their behaviour from there. This leads to false conclusions and confusion. The best example of this is the way intellectual property is viewed. Although Communist only in name – State-Capitalist, quasi-Stalinism is probably more accurate – the Chinese assessment of intellectual property, and how intellectual property should be treated, betrays the difference in belief between the US and China. Accusations of intellectual property theft, and the subsequent denials thereof, are met with moral objections, resulting in a situation where necessary presuppositions to start productive negotiations struggle to be established.
China’s bid for supremacy in the information age: How can one privatize an idea? Isn’t a communicable idea itself a common good? Probably too crudely put, this (perceived) issue with American capitalism can be articulated. As an aside, these questions go well beyond the US-China trade negotiations and can be found in the way businesses have struggled to monetize ideas in the age of free, sharable information. As it relates to the trade-war though, notice the conspicuous absence of talk about the China 2025 plan from China’s political-elite. It was founded on the objective of becoming the world’s leading tech-powerhouse in a decade’s time. While still clearly the goal of policymakers, the sensitivity of IP issues has meant that document, in a public sense, has been quietly shelved.
ASX probably needs a trade-resolution: Australia is in an invidious position, as is well known, when it comes to the trade-war. We are stuck balancing the interests of our military and ideological bedfellow on one hand; and the manufacturer of our warm economic safety blanket on the other. Australian market participants keenly wait for a trade-deal and hope for a de-escalation in the strategic tensions. This morning, last night’s trade war noise has reduced the gains implied by the SPI Futures contract to 7 points. We await some substantial develops in trade negotiations and the Chinese economic story before the bulls reclaim control of the market. The ASX has tracked sideways recently after all, only supported by a lucky run higher in iron ore prices, and a fall in interest rate expectations.
Written by Kyle Rodda - IG Australia
