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MaxIG

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Blog Entries posted by MaxIG

  1. MaxIG
    Written by Kyle Rodda - IG Australia
    Friday session: Friday capped off another horror week for Wall Street. It was US equities’ worst week since March. Traders are currently operating within a volatility trap – and there are few indications this will soon end. The VIX is elevated, above 23 at the last reading, but occupied time above the 25-mark at stages during the week. Volatility is an active trader’s friend, and for the most part the opportunities it has thrown have been relished. Liquidity is becoming thin though, and there is a sense that the risk-reward dynamics in certain asset classes have changed. For perennial bulls, or those who have long term investments in equities space, there is undoubtedly a lot of pain being experienced. If the activity across equity markets on Friday is any guide, this is something that is set to last.
    Shifting narratives: The narrative has definitively shifted. It might even be said for the bulls that it has gone from bad to worse. On the surface, since October, downside risks have manifested and grown in global equities. For many-a trader, whatever the root cause of this dynamic is secondary to being able to play the trend. But something interesting has happened recently, and it’s worth knowing to appreciate the way the market has changed. The initial stages of this market correction were precipitated by the fear an (over)active US Fed would hike rates to a point that would sink the global stocks. In some way, the effects of such a phenomenon played-out in markets just by way of virtue of the pricing in of those expectations. US Treasuries were rallying, the US Dollar trended higher, and growth-stocks plunged on the belief solid economic data would justify interest rate hikes.

    The “real” economy: But this isn’t the case anymore; this isn’t about shifts in intermarket behaviour, contained primarily to financial markets. The concerns now relate to the prospects for the real economy. To repeat: October and November were about adjusting to a Hawkish Fed. December has so far been about slower global economic growth. It’s a problem with Main Street, perhaps more than Wall Street, that traders are worried about. The bond market is king, no matter how much attention stock markets get. The best information comes from reading into what is occurring in bond markets – especially US Treasuries. As has been discussed a-plenty, the US Treasury Yield curve is exhibiting signs of inverting. Traders are telling us they think growth in the medium term will be soft.
    US Inflation expectations: There is another useful indicator to use in the fixed income market: the TIPS spread. More-or-less: the spread is a crude measure of future inflation. When traders were stressing-out about an over-zealous Fed, it was primarily due to fears that some (albeit modest) outbreak inflation was upon us. Interest rate hikes would be the necessary and mandated response. At this time, the TIPS spread (on equivalent 10-year securities) was about 2.20% -- that is, future inflation was tipped to be around 2.20%. Flash forward to its most recent reading, and that indicator has fallen to 1.95%. Inflation-risk is being priced out of the markets, along with the prospects of healthy economic growth. Ergo, interest rate traders have called-out the Fed and demanded the central bank “Say Uncle!”.

    US Non-Farm Payrolls: Whether this reaction proves justified will be fascinating. Markets are forward looking, so current economic data is only good as far as it can be used to extrapolate answers about the future. Nevertheless, the data coming out of the US is (generally) satisfactory. The latest Non-Farm Payrolls release came out on Friday, and the numbers were okay: the US unemployment rate is 3.7 per cent, and annualized wages growth held at 3.1 per cent. The jobs-added figure was a big miss, coming in at 155,000 – also, although respectable, the wages component did print below expectations. However, stripping-out the highly charged emotions in financial markets at-the-moment, the figures produced by Non-Farm Payrolls were objectively solid. The picture it painted of the US economy was good.
    Friday’s price action: But that doesn’t matter in this market. The bears are winning, and the bulls are looking for any excuse to sell. Wall Street experienced another poleaxing on Friday night, backing on from a mixed day in Europe: the NASDAQ was down over 3 per cent again, while the Dow Jones and S&P500 were down nearly 2-and-a-half per cent. Rates and bonds didn’t respond well to the Non-Farms data: the yield on the US 2 Year Treasury fell to 2.71 per cent, while the yield on the US 10 Year note fell to 2.85 percent, taking the spread there to 14 basis points. The US Dollar took a dive, breaking upward trend support, launching gold through resistance to $US1249 per ounce. The EUR and Yen naturally benefitted from the weaker greenback, but the AUD is still struggling, unaided by a fall in iron ore, which fell despite climbs in other commodities.


    ASX, and the week ahead: The last price on the SPI futures contract is indicating a 30-point drop for the ASX200 this Monday. This comes on the back of a relatively uneventful, but solid day for the index on Friday, which managed to eke out a 0.4 per cent gain. This week is filled with a litany of risk events. The first market to watch might be the oil market, after OPEC+ agreed over the weekend to cut production to stabilize falling prices. The trade war and the developments in it relating to the arrest of Huawei CFO Meng Wan Zhou will be curious. US CPI, PPI and Retail Sales data will be closely watched too, as traders gauge US economic health.
    The week may well prove to be more about Europe, though. There is a stack of event risk coming up. It may well not go ahead, but Brexit is scheduled to vote on UK Prime Minister Theresa May’s Brexit bill. The Cable is worth watching ahead of that event. ECB President Mario Draghi speaks, and the ECB meets, with his commentary to be perused for signals that the Europe’s central bank might be stepping away from its potential rate hikes. Whatever is said by Draghi will be assessed against a slew of PMI figures. And finally, the Italian fiscal crisis will probably continue to be a soap-opera, though hopes are rising that the Italians are going to play ball.
  2. MaxIG
    Written by Kyle Rodda - IG Australia
    A (relatively) settled session: It’s been a soft day for global equities. With almost exactly two-hours to go in the US session at time of writing, another modest rally has apparently been faded by traders. Indications are that Wall Street will close lower. If proven true, this will punctuate a mixed day for Europe, and quite a solid day for the Asian region. The former found little impetus to be bid higher, while the Asian session showed the ebullience of diminishing trade tensions. Scanning the major indices, volumes were up compared to their 100-day average, however were slightly down when compared to their 10-day and 20-day average. It reveals a market that is more settled than what it has otherwise been seen during the global share-market correction – but remains vigilant and prepared to turn at the sight of bad-news.
    Global growth: Given price action in last night’s trade was relatively more subdued, traders and analysts seemed able to take the clearer air to reflect on current market drivers. The theme that’s popped up consistently in the last 24 hours can be crudely articulated as “downside risks to growth”. It was a theme adopted by ECB President Mario Draghi during his press conference following last night’s ECB Meeting; and it was also referenced by PBOC last night in relation to China’s economic fortunes. It bears repeating: October, November and December in markets have been characterizes by bearishness, of course. However, the causes throughout this period have shifted. What was initially a sell-off catalysed by fears regarding higher US interest rates has transformed into one driven by fears about slower global economic growth.
    ECB meeting: Last night’s headline event captures this well. The ECB met and broadly met traders’ expectations: rates were of course kept on hold, and the central bank’s QE program will come to an end. As always, the commentary and press conference were where the interest lay, and ECB President Draghi delivered a cautious but stark message. The balance of risks to the EU economy have shifted to the downside. The ECB lowered its forecasts for growth and inflation, even further below what could be considered objectively strong figures. Overall, President Draghi was judged as quite dovish about the prospects for European monetary policy. Though it was not stated explicitly – central bankers rarely communicate in such a way – the subtext of the speech strongly implied that any true policy normalization from the ECB is some way off.

     
    Whatever it takes: It’s a fascinating conundrum for the ECB. After a decade of experimental monetary policy, on balance the central bank’s greatest endeavours haven’t seemed to work. President Draghi’s “whatever it takes” attitude has supported markets, but evidence for his success is scant. The counter-argument to this pessimistic take on the Eurozone and ECB always seems to go something like “yes, things aren’t good, but imagine how bad things could have if the ECB hadn’t done what it did!”. It could be a valid point – one better for the historians to take care of somewhere down the line. However, the situation is poised to be this: the global economy will eventually experience a recession, and the ECB will more-likely-than-not be at effectively negative interest rates. The whole affair engenders very little hope or confidence in the future of the European economy.
    The news flow: That reality considered, traders tipped their hat and gave a sympathetic nod to the ECB after its meeting, and more-or-less moved on. There wasn’t much bullishness to be found in markets last night, however it wasn’t a risk-off night either. A lot of commentary overnight has pointed to the trade-war being behind the session’s softness. China has reportedly detained another Canadian citizen on national security grounds, presumably in retaliation to Canada’s arrest of Huawei CFO Meng Wanzhou. While on the other side of the world, members of the Trump administration declared that China ought to concede more to resolve the trade dispute. Overall, there was little substantial or game-changing revealed to markets – mostly just noise relating to the familiar and ongoing concerns that have been long-rattling markets. Today’s big Chinese data dump will be now be the one to watch.
    Not risk-off; but not risk-on: The price action communicated this reasonably well. US Treasury yields have stayed (fairly) still: the US 10 Year note held at 2.90 per cent, and the US 2 Year note dipped 1 point to 2.75 per cent, widening the spread there to 15 points. Wall Street is heading for a flat day, though with an hour to go in trade, the Dow Jones is a skerrick higher. The DAX and FTSE were both down 0.04 per cent. The greenback pushed-higher, mostly due to a weaker EUR, which fell to 1.1364. The Pound is up a skerrick, while the Yen, reflecting the day’s sentiment, fell slightly, just like gold, which is holding support above $US1240. The Australian Dollar is practically trading sideways at 0.7220. Credit spreads narrowed on the perception of diminished risk. And in commodities markets, copper is flat, and oil and iron ore rallied.
    ASX200 today: This is the context for Australian trading today, and with all of that digested, SPI futures are telling us we are set for a 14-point drop at the open for the ASX200. The ASX took the momentum generated by the improved sentiment about global growth yesterday, with the cyclical mining, consumer discretionary and industrial sectors some of the best performing. The rally lost legs throughout the day, as traders seemingly opted to fade the run once again. Volumes were high, but breadth was uninspiring.
    The foundations are set for another lower-high for the ASX200 index, reinforcing the notion the market is in some bearish down trend. Some contrary evidence suggests the worst is behind us: the RSI is still showing bullish divergence, and downside momentum is moderating. As it currently stands, a new low, as far above 5510 as possible, and/or a rally through resistance at 5705, is broadly the challenge the market needs to overcome to demonstrate evidence of a possible bullish turn in this market.

  3. MaxIG
    Market sentiment: Markets put in a mixed day on Friday. The results for global equities were generally poor, but absent were any violent swings in market activity. Individual regions traded -off apparently their own idiosyncratic drivers, characteristic of the diverse web of risks plaguing investors. Chinese indices were the stand-out, climbing more than 2.5 per cent, collectively, while European shares were generally lower, and US stocks were mixed. The mood is still edgy and dour for equities overall, with the weight of an extending list of risks stifling appetitive for riskier assets. There is a growing sense now that the many and considerable challenges facing market participants are here to stay; the matter hence becomes what level of willingness do market participants possess to stomach these and push equity markets higher.
    Risks-elevated: Uncertainty and instability isn't something novel for traders -- it's reigned for the last decade, as is well known. Yet it's proven now that there doesn't necessarily exist the confidence that, with the world's most powerful central banks turning off the liquidity taps, markets have the strength to sustain themselves. To be perfectly fair, 12 months ago, an all-out trade-war, the seeds for huge US twin deficits, a new Italian fiscal crisis, a Chinese economic slowdown, and major regional instability in the Middle East wasn't seriously expected. Without such interferences, perhaps the global economy would have been on stronger footing. It's pointless to speculate, however one can safely assume at this stage of the economic cycle, fundamentals should be presenting as much firmer.
    Economic fundamentals: The way in which this dynamic of higher risk and lower confidence plays out in Australian markets will be curious, as the final stages of the calendar year unfold. The US economy is booming and that will anchor the global growth story until the Fed's interest rate hikes begin to lean on the US economy. For us down under though, it's of lesser relevance than what transpired in the Chinese economy. The massive data dump delivered on Friday out of China was on balance underwhelming: headline growth was lower, while the other tier-2 data releases didn't salvage much. The Australian economy is ticking along relatively nicely it must be said, but our economic fortunes will stay wedded to China's almost undoubtedly, with the effectiveness of Chinese policymakers attempts to stimulate their economy the key variable.
    China: As far as markets go, equity indices seemed to benefit from the latest salvo by some of China's top economic officials about tackling any economic slowdown. In effect, policymakers came-out on Friday and implored market participants that they would ensure that a floor was placed under the recent sell-off across Chinese shares, in the interest of capital safety and financial stability. According to the slew of top-regulators who delivered the message, the massive tumble (30 per cent year-to-date) in Chinese stocks isn't reflective of the nation’s fundamentals, so support, it is argued, can justifiably be provided to align financial markets to the economy.

    Europe: Although this story did underline a late rally in Chinese shares on Friday, the benefits diminished, if not disappeared, in the grand scheme of things, by the time the European session got underway. Fizzled Brexit negotiations were parsed, but weren't a significant sticking point for European traders, who were apparently more relieved about a modest easing of tensions between European bureaucrats and the Italian government about that countries fiscal problems – even despite a rating cut to Italian debt. The EUR and Pound ticked slightly higher and JPY dipped as anxiety around European political stability and China's growth moderated slightly, while US Treasuries declined throughout the day leading into the North American open, losing its haven bid, edging the yield on the 10 Year note to 3.19 per cent.
    Wall Street: US stocks delivered little in the way of upside, slowed by activity in tech stocks again. Earnings season hasn't delivered the lift so far to US equities as hoped, stifled instead by the effects higher discount rates are having on stretched valuations in growth/momentum stocks. The Dow Jones did close 0.26 per cent higher –  led by strong trade in consumer staples stocks and other defensives, along with financials, which gained on higher bond yields – however the more comprehensive S&P500 was flat. Worries that earnings growth leading into 2019 will be dampened drove the mood in US markets, with the key litmus test for this hypothesis possibly coming this week, as traders prepare for earnings reports from the likes of Alphabet, Microsoft and Amazon.
    ASX: SPI futures are indicating a 12-point drop for the ASX200 against this backdrop, ahead of a day which should be of interest given the possible impacts of a hung parliament in Canberra. In the recent past, when confronted with leadership challenges and the like, it’s proven a drag on the A-Dollar and the ASX200. The banks have borne the greatest brunt, probably due to the regulatory crack down and the perceived unfriendly stance towards property and share investors by the Labor opposition – though it must be said but this risk has already been priced in by investors. Friday’s trade saw the bank witness a continued pop higher from its oversold levels, keeping the ASX200 trading flat for the sustained. Slightly higher commodity prices may aid the Australian share market in the day ahead, however with little real impetus for rally today, perhaps a grind more-or-less sideways can be expected to start the week.

  4. MaxIG
    Not with a bang, but with a whimper? Without all the fire and fury that we saw in December, markets are pricing in once again a slow down in global economic growth. It could be strongly argued this is evidence of how important US Fed support is to equity market strength – but that’s a drum to beaten (over-and-over-again) for another day. Fundamentally, traders are quietly re-pricing for a world where economic growth will be weaker than once thought. Such behaviour has been long evident in Chinese markets, so there’s nothing new about pessimism in the Asian region. The point of focus now is in Europe, and to a lesser extent North America, which is increasingly demonstrating signs that market participants believe those economies are briskly approaching a period of (even) lower rates, growth and inflation.
    The many facets of the global growth story: There’s no shortage of causes for this looming slowdown – and in the financial media, each one is getting a good exercising. The trade-war remains the popular one, which is providing a convenient explanation for the confluence of confusing and complex causes for China’s recent economic malaise. This thread gets pulled-on to describe why Europe is feeling the pinch too, being the geography wedged in the middle of the trade-war’s heavyweight combatants. Throw in a sprinkling of Brexit anxiety and internal political unrest in the continent and that’s the story driving Europe’s economic outlook. The US economy is still humming, and the data coming out of the states is still showing a robust economy. Nevertheless, price action says that’s being somewhat ignored, with yields betraying an underling anxiety about economic health.
    What the bond market is saying: Essentially, it’s all written in yields at present. A few unwanted milestones were achieved in bond markets on the weekend. The most significant was in German Bunds, which saw the yield on its 10-year fall to 0.08 per cent – its lowest point since 2016 – even though rates markets leaving unchanged the implied probabilities for ECB decision making in 2019. 10 Year Japanese Government Bonds are back below 0 per cent, as markets stay resigned to the fact that the Japanese economy will see no signs of inflation for the foreseeable future. And despite there being an absence of data impetus to cause this – other than a general “risk-off” tone for Friday’s trade – US Treasuries climbed as traders priced in the increased chance the Fed will cut rates this year.

    The RBA adds its 2 cents worth: The market’s central premise that interest rates will need to fall the world-over manifested just as clearly in domestic trade on Friday. The RBA’s Statement of Monetary Policy, released on Friday morning, delivered to markets the material to price in further downside risks for local rates. Following the central bank’s meeting on Tuesday last week, and RBA Governor Philip Lowe’s influential speech on the Wednesday, it’s perhaps a surprise that anymore dovishness from the RBA could be priced into the forward curve. Lo-and-behold, there was, with the immediate reaction from markets towards the RBA’s SOMP to increase rate-cut bets in 2019 to over 60 per cent, bid higher Australian Commonwealth Government Bonds, and to sell-out of the Australian Dollar – pushing the local unit below the 0.7100 handle, subsequently.
    The RBA’s take on economic growth: It was another softening of the RBA’s economic growth outlook that spurred the flurry of activity. The SOMP was far from a manifesto of doom-and-gloom. However, what markets have for a while been predicting came clearly in the RBA’s opening lines of the document: “GDP growth slowed unexpectedly in the September quarter… The Bank’s growth forecasts have been revised down in light of recent data, particularly for consumption. GDP growth is expected to be around 3 per cent over this year and 2¾ per cent over 2020.” There was plenty of good news contained within the SOMP, it must be stated, especially as it relates to the outlook for the labour market. Sentiment clung to the growth outlook nevertheless, as traders assessed how a global economic slowdown will manifest down-under.
    The ASX followed global equities lower: The fall in yields on ACGBs and the Australian Dollar proved once again supportive of the ASX200, but the effect was fleeting. It was a bearish day for the ASX on Friday, no matter which way you spin-it. It was simply one of those days for risk assets, as the bulls took themselves to the sidelines for a breather, at the end of a week which was -balance very good for stocks in Australia. Equity market strength throughout last week was perhaps lacking in other parts of the world: Wall Street finished its week higher by a very slim margin, equity markets in continental Europe shed over 1 per cent across the board, the Nikkei dropped over -2.00 per cent, while a weaker Pound kept the FTSE in the green.
    Price action for the ASX200: The last traded price in SPI Futures is pointing to a 4-point drop at the open for the ASX200 this morning. The market demonstrated some signs of short-term exhaustion on Friday, after its face-ripping rally earlier in the week, as higher than average volumes propelled the index higher. Resistance at ASX200’s September low at around 6100/05 was dutifully respected as the week’s high. The daily-RSI is still in overbought territory, though not flashing a sell-signal nor a major change in momentum yet. The week’s break of the 200-day EMA is seeing that moving average slowly turn higher, which bodes well for the bulls. In the immediate future: the long-awaited pullback could be upon us here, with the November high at 5950 the next logical support level to watch.

    Written by Kyle Rodda - IG Australia
     
  5. MaxIG
    Wall Street: It's still early days, but investors appear to have regained their nerve overnight. The Asian session was tepid, to be sure, however a rally in European and US equities reveal a market that has found its appetite for equities again. As the existing narrative would imply, much of this was underpinned by a fresh appetite for rate-sensitive US big tech stocks, which according to the NASDAQ, rallied almost 3 per cent overnight, leading both the Dow Jones and S&P in the realms of 2 per cent higher. Implied volatility fell, but remains relatively high at around 18, so of course it would be foolish to claim the recent sell-off is authoritatively through. In stating this, commentary has shifted away somewhat from risks from rates and tariffs, to anticipating the fruits of what is expected to be a bumper reporting season – particularly after the likes of Goldman Sachs and Morgan Stanley posted impressive results early this morning.
    Europe: Likely owing to being largely oversold to begin with, the strong activity in European equities come despite a mixed-news day for the region. Like much of the global-share-market following last week’s equity rout, valuations and dividend yields within European indices have become more attractive this week, apparently enough to attract buyers into European share markets, even against doubts regarding the strength of the region’s upcoming reporting season. UK data provided some impetus for the bulls last night, after labour market figures showed that the unemployment rate held at 4.0 per cent and average earning climbed by an above forecast 2.7 per cent. The GBP/USD pushed-up just below the 1.32 handle on the news, however rate markets were more-or-less steady, as traders ostensibly tie their BOE rate-hike bets to the outcome of souring Brexit negotiations.

     
    Macro-backdrop: The boost to investor sentiment has infused equity traders with glimmers of confidence, though the greater appetite for risk hasn’t necessarily flowed through to other asset classes. Yields on US Treasuries were flat the last 24 hours, and despite climbing back above the 112-handle against the Yen, the US Dollar has failed to catch a major bid. Risk proxies like the AUD and NZD are a skerrick higher, with the Aussie Dollar floating about 0.7140, but gold is still finding haven buying, holding above a support line at $US1224. Moreover, proving that last night’s rally isn’t on the firm basis of greater confidence in global growth prospects, the Bloomberg Commodity Index edged 0.1 per cent lower, even considering a sustained increase in oil prices amid fears of lower supply because of a potential rift between the US and Saudi Arabia.
    ASX: The strong overnight lead has SPI futures pointing a 28-point jump for the ASX200 at this morning's open, following a day in which the Australian share market popped modestly higher from its oversold levels. The pop was reflected primarily in the activity in bank stocks, which rallied-off its own oversold reading, to collectively climb 0.55 per cent for the session. It was the materials space though that led the index higher, courtesy of a 1.4 per cent rally, despite the limited price gains in commodity prices yesterday. The day's trade establishes an interesting dynamic for the ASX200 today: the index fought unsuccessfully throughout trade to re-enter last week's broken trend channel. Futures markets has this transpiring at the open - a positive sign for the Aussie market.

     
    Regional data: Despite leading to limited price action across the region, Asia was littered with fundamental data yesterday. It was kicked-off early morning our time, upon the release of key New Zealand CPI data, which revealed stronger than expected consumer price growth of 1.9 per cent annualized for that economy. The algo-traders seemed to kick-in post the event, pushing the NZD/USD to the significant 0.6600 handle, before human rationality took over the pair lower, primarily on the knowledge that the data wouldn’t change materially the RBNZ’s interest rate views. Chinese CPI data was also printed yesterday, revealing an-expectation figure of 2.5 per cent – up from the previous 2.3 per cent. Once again however, although inflation is proving to be running a little hotter in China, trader’s judged that the news wouldn’t shift the dial for policymakers and promptly moved on.
    RBA’s Minutes: Of domestic significance, the RBA released the minutes from their recent meeting, with very little novel information to glean: “members continued to agree that the next move in the cash rate was more likely to be an increase than a decrease. However, since progress on unemployment and inflation was likely to be gradual, they also agreed there was no strong case for a near-term adjustment in monetary policy”. The reaction in market was one of the more muted from an RBA release, registering barely a reaction across financial markets. There were some interesting points discussed from a purely academic perspective in the document – some substance for the economics-nerds – especially relating to hot global asset prices, but nothing in the way of potential policy approaches from the central bank.
    FOMC Minutes and Reporting Season: Approaching the half-way mark for the trading-week, investors prepare for its pointier end. The major event will transpire tomorrow morning local time, in the form of the FOMC Minutes from the US Federal Reserve’s last monetary policy meeting. Of course, most of panic and volatility in global markets has come because of the Fed’s hawkishness in recent times, so market participants will peruse the details of tomorrow’s minutes for insights that confirm or deny fears about higher global rates. The broader market will also engross itself further in US reporting season, with Netflix (for one) posting what is being considered currently a better than forecast set of numbers, by way of virtue of a smashing of subscription growth estimates.
  6. MaxIG

    APAC brief - 27 Mar

    By MaxIG,

    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
  7. MaxIG

    APAC brief - 21 Nov

    By MaxIG,

    Written by Kyle Rodda - IG Australia
    I see red: The global equity rout continued last night, and out to the furthest horizons it was a sea of red. There was very little reprieve no matter where one spun the globe. The Asian session saw China's equity bounce faded again, joining the suffering experienced by the Nikkei, Hang Seng and ASX200; European indices continued their orderly decline, underpinned by a 1.6 per cent drop in the DAX and a 0.76 per cent fall in the FTSE 100; and with less than an hour to trade, Wall Street is clocking losses, led by the Dow Jones, of as much as 2 per cent. The themes aren't wildly different from before, it's just now the story is being read (and bought-into) by a growing mass of traders: global growth is late-cycle, earnings have peaked, and tighter financial conditions means there's no hiding from the risks.

    Seeking shelter: Not that market participants aren't searching for places to hide. The problem is, it would seem, that there aren't too many good places to find shelter. The classic safe-havens were given a good crack overnight: US Treasuries were sought out, giving the US Dollar a boost after several days of declines. Yields on US Treasuries were steady; however, this appears more a function of the residual need to maintain pricing of interest rate expectations. Gold was slightly lower because of the stronger USD alone, as was the EUR/USD, which traded into the 113-handle again, and the Pound, which dropped into the 1.27 handle. Even the Japanese Yen dropped slightly as traders scurried around, though it must be said it is far-off its recent lows.
    The losers: The flip side to the bidding-up of safe-havens was a smack-down of riskier and/or anti-growth assets, of course. The Australian Dollar is trading into the low 0.7200's and the Kiwi Dollar has slipped below 0.68. The Chinese Yuan edged to 6.94 and broader emerging currencies felt the pinch, again. Commodity prices fell on fears of slowing global growth: copper is off (but it did bounce of the day's lows), and of local relevance, iron ore has plunged by over 2 per cent. Bitcoin too has finally exhibited its status as risky and speculative "asset", spiralling further, to just over $US4,500, at time of writing. Credit spreads continue to widen, especially in investment grade corporate bonds, portending sustained weakness in global equity markets.
    Fresh falls for oil: Amid all this selling and search for safety is the conspicuous matter of oil: the black stuff arguably fared worst of all overnight, shedding over 6 per cent. The concerns regarding a massive global over supply continued, as analysts forecast higher inventories and a higher-likelihood that major oil producing countries will prove unable (or unwilling) to collectively cut production. The dynamic has prices of Brent Crude trading at $US62.50, and that of WTI at around $US53.50. Energy stocks were some of the worst performing for the overnight session -- a theme that is expected to persist today –  while the oil sensitive Canadian Dollar fell to 1.33 on fears of a deterioration in that countries terms of trade.

    Less news, more uncertainty: The volatility experienced in just the first two days of the week -- the VIX spiked to about 22 again overnight -- gives further credence to the notion that light data weeks exaggerate price action. It's like existing in a vacuum, whereby a lack of air resistance makes everything move much more swiftly. In good times, this doesn't feel so bad:  it's an excuse to buy, and everyone is mostly happy. However, in this new period of uncertainty, the opposite proves true: less information means fewer opportunities to find certainty and reassurance in data. As such, trading picks up a velocity that exaggerates what might otherwise be tempered movements in markets, spawning vicious cycles where fear feeds and multiplies on more fear.

    ASX yesterday: The ASX200 hasn't been spared from this cycle -- and feels an immediate escape will not be forthcoming. The index fell with far greater force than was anticipated during yesterday's, as the broad-based evacuation from equities persisted. The tech-wreck theme has spilled over into our market: momentum chasers are being washed aside, legging high-multiple growth stocks. It was the IT and healthcare sectors that subsequently experienced some of the highest activity and losses, the culmination of which saw the ASX200 come conspicuously close to the oft-mention support level around 5625, or so. Buyers entered the market at that level, allowing the market to staunch its losses seemingly as bargain hunters searched for value in the large caps. However, it was only enough to curb the session's losses to about 0.4 per cent.
    ASX today: The lead handed to us by Wall Street has SPI futures indicating quite a considerable drop for the ASX200 at today's open of 58 points, or about 1 per cent. If that were to eventuate, support at around 5625 would quickly give way and expose the key-psychological mark of 5600 to a challenge. Considering what’s been witnessed on markets this week, today may once again be a case of what can lose least. The utilities space and other defensive sectors look to be the early favourites for that title, but it may be one that won't be won without sustaining a few battle scars. Given the overnight moves, the materials sector and energy stocks are presenting as the likely biggest losers, with activity in the banks perhaps the uncertain variable considering a bounce in the Big 4 late yesterday.

  8. MaxIG
    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.

    Written by Kyle Rodda - IG Australia
  9. MaxIG
    A flowless rally: It’s being dubbed the “flowless rally”. Equities are ticking higher, but without the fundamental buying-support one might assume. This is especially so when considering the milestone achieved on Wall Street on Friday. Finally, the 2815 resistance level has tumbled, and the bulls have cautiously, quietly rejoiced. There are yellow flags popping up here and there, however, and that is making participants wary. It goes back to this “flowless rally” business: the latest leg of global stocks big recovery isn’t being supported by investor flows. In fact, investor flows look to have diminished somewhat. The reasoning behind this move is somewhat speculative. The impact of share buybacks is one popular argument. Whatever the cause, confidence isn’t accompanying this rally.

    Economic conditions deteriorating: Maybe market participants are still scorned from the market correction in 2018. A bitterness and cynicism stemming from that is understandable. Much of the frustration comes, it would seem, from a widespread recognition that this rally has come in the absence of solid fundamentals. On the contrary, if looking at the macro-outlook, there are more reasons to be bearish than bullish right now. Global growth is (almost) irrefutably slowing, and some of the geopolitical sore-points dictating sentiment, like Brexit and the US-China trade war, are showing little new signs of progress. A major factor keeping this rally alive in riskier assets, perhaps concerningly, is a little case of “fear of missing out”.
    Markets betting on policy support: Policy makers are igniting this behaviour: market participants are hoping-big that they can turn the economic ship around. Such policy intervention if for good cause, and with good intentions, of course: economic growth the world over is wheezing, and those whose job it is to address this affliction are experimenting with ways to cure it. The concern now relates to the unintended consequences, of course. Just on Friday, two more stories relating to stimulatory economic policy galvanized markets. The first came from the board of the Bank of Japan, who as expected downgraded their economic outlook and hinted at sustained monetary stimulus. The second came from Chinese Premier Li Keqiang, who announced more fiscal measures to tackle China’s economic slowdown.
    Premier Li stokes optimism: The latter of the two stories carried most weight. It betrays what financial markets’ biggest concern is now: the health of the Chinese (and therefore global) economy. The move into stocks and growth-tied markets on Friday was catalysed by Premier Li’s boldness, especially. In a bid to quell concern about a deterioration in China’s labour market, he stated the Communist Party leadership would look to lower the Reserve Ratio Requirement, cut taxes, and lower interest rates if necessary. Risk and growth assets across the region rallied on the news. The CSI300 added 1.26 per cent for the day and the Australian Dollar climbed back towards the 0.7100 handle – the latter despite little move in yield spreads.
    The more accurate indicators: Although there were signs of optimism in speculative assets because of the prospect of further stimulatory fiscal and financial conditions, better barometers of the growth outlook were unmoved. Bond yields generally fell, as traders continued to price in a world of lower growth and falling interest rates. The US 10 Year Treasury Note closed at 2.58 per cent over the weekend; and bets were increased that the US Fed, ECB and our own RBA would have to cut rates at some stage before the end of 2019. Granted, this dynamic has supported equites, and risk assets like corporate credit. However, if economic growth is to slow like expected, the question is: how long is it before slower growth manifests in the earnings outlook?
    Measures of fear stay subdued: Only the shiniest and clearest crystal ball can predict that one. Market participants may prove emboldened in the short term irrespective, as a hunt for yield, some technical drivers, and a touch of momentum spur the herd to push the market higher. Naturally, this comes with risk, although the areas one might expected to see hedging against this aren’t finding love either. Gold is up but remains closely wedded to the $US1300 pivot point. The US Dollar isn’t attracting safe haven flows in the short term, either. Perhaps most tellingly, the VIX has continued to creep lower, closing last week at 12.88; and poetically, finds itself at lows not registered since Jerome Powell’s notorious “a long way from neutral” speech.

    ASX200 to leap out of the gates: It hasn’t been the most reliable indicator of the intraday fortunes of the ASX200 of late, but the last traded price on the SPI futures contract is indicating a 35-point jump at the open today. A part of this ought to occur by virtue of a small bounce back following Friday’s index rebalancing, which saw heightened activity in heavily weighted stocks at Friday’s close. Last week for the ASX200, when contrasted with the world’s other major equity indices, was underwhelming. It was one of the few to close lower for the week. Wall Street traders are mumbling about the potential for US indices to clock new all-time highs currently. For us, the ASX200 is now 2.76 per from its decade-long high.
    Written by Kyle Rodda - IG Australia
  10. MaxIG
    Written by Kyle Rodda - IG Australia
    Week starts soft: Global equities are down to start the new week. The stories driving the overnight moves are slightly different, but the themes remain the same: the dual risks of higher global interest rates and the prospect of slower global growth has put the bears (at least momentarily) back in control. It can feel repetitive to keep having to reel-off this story. Slower growth, higher rates, slower growth, higher rates – the message keeps echoing throughout markets, giving market participants a sensation of vertigo. Although it must feel trite, the inescapability of the slower growth and higher rates mantra speaks of the gravity of each concern. The fact is, markets are a smidgeon away from being half-way through November, and for most major-global stock indices, the recent ructions in equity marks means that the year has delivered nothing in return.
    Fears of peak growth: Now of course, to reduce the return on equities to the gains and losses delivered from January 1 to now is far too simplistic. For the many who have been in the market longer than that, or for those who have timed their run well, the year has provided ample opportunities to attain a fruitful profit. The point is however that whatever the market has been able to bequeath to the individual trader or investor, overall, equities are looking increasingly like they have hit their peak for this cycle. This is far from assured naturally and speaks only of a developing consensus – mere perception, quite possibly -- amongst market participants. However, considering how long investors had to wait for these condition, the many distractions that have enervated market activity in the second half of this year has led many to the belief that an opportunity has been squandered.

    Wall Street: It’s this frustration that underpinned market sentiment overnight. Big tech was once again the biggest loser on global stock markets, with the NASDAQ down by over 2 per cent, and the broader S&P500 down 1.13 per cent, at time of writing. The sell-off in the tech giants has pushed the P/E ratio across the NASDAQ, below 40/1 once again. Volumes have picked up throughout the day in US trade, but they have been hindered by the absence of bond-traders in the market due to the US Veteran’s Day holiday. That has deprived traders of the ability to assess the information contained within US Treasury yields – likely adding to the negative tone of US trade. Despite activity in rates and bond markets being subdued (if not totally missing), the US Dollar has flexed its muscles, touching a near-18 month high and looking primed to burst higher from here.
    Currencies: Much of the strength of the US Dollar, it must be said, is emanating from a much weaker Euro and Pound. Geopolitics and its economic ramifications (typically) dictated trade in European markets yesterday, pushing the DAX down 1.77 per cent, and dragging the FTSE (which did find some very limited support from a weaker currency and a bounce in oil prices) 0.74 per cent lower. The state -of -affairs of the European economy still appears ugly: there was a flaring of anxieties regarding the Italian fiscal crisis yesterday, which lead to a widening of bond spreads across the region; while the hope that a Brexit deal will be delivered by the end of the month is waning. It was these two narratives that drove EUR/USD below support at 1.1310, to presently trade just below 1.1250; and dragged the GBP/USD deep into the 1.28 handle, once more.

    Asia: The stronger US Dollar coupled with the “weaker global growth” narrative has seen the Aussie Dollar shed about half-a-per-cent, likely in sympathy with the offshore-yuan, which has plunged back into the 6.96-handle. This comes despite a solid day’s trade throughout the Asian region: although far from the strongest day we’ve seen from Asia’s equity indices lately, the CSI300 managed to add 1.19 per cent for the day, the ASX200 managed to close 0.33 per cent higher and above key-resistance at 5930, and the Nikkei and Hang Seng finished the day up 0.1 per cent on very thin volumes. Sentiment was probably given a boost by the massive “Single’s Day” in China – that generated approximately $US31b worth of sales in the space of 24 hours yesterday – however, the benefit was short-lived, with European and US traders from the far greater fundamental challenges facing the Asian region.
    ASX200: SPI futures are indicating a 57-point plunge for the ASX200 this morning, weighed-down by the weak lead from Wall Street, combined with the jump in implied volatility courtesy of the concerns surrounding global growth. The materials and health care sectors led the market higher yesterday, offsetting the fall in the financial sector caused by ANZ trading ex-dividend, in a day that saw breadth at a solid 60 per cent. Softer commodity prices and potential bearishness in Chinese equities present as the challenges for Australian shares in the day ahead. Copper prices have been dumped 1.6 per cent overnight, gold has fallen victim to the stronger greenback to challenge support at $US1200 per ounce, and oil has dipped by 1.4 per cent in Brent Crude terms – boding all in all poorly for the materials and energy sector in the day ahead.
    Oil update: Another oil update is certainly required this morning, after the sensitive politics of the black-stuff became inflamed overnight. It didn’t take long for it to happen: with all this talk coming out of OPEC of supply and production cuts in 2019 over the weekend – the result of which was enough to break oil’s 10 day losing streak yesterday – US President Trump waded into the issue via Twitter last night, tweeting “ Hopefully, Saudi Arabia and OPEC will not be cutting oil production. Oil prices should be much lower based on supply!” The comments from the US President – made only a matter of hours ago – has dumped the price of Brent Crude to a new 7-month low, and the price of WTI to a 10-month low, as traders seemingly increase bets that the US may boost oil production to offset reduced supply from OPEC+ if they were to occur.
  11. MaxIG
    Written by Kyle Rodda - IG Australia
    Asia and Europe’ Monday: Markets were generally experiencing a much-desired bounce for the better part of Monday, enabled by a day light on market moving information and data. The confirmed election of populist Brazilian leader Jair Bolsonaro boosted emerging market indices. News that German Chancellor Angela Merkel would be stepping down as leader of the governing CDU party, combined with a ratings downgrade of by Italian debt S&P, sent minor ripples throughout Europe, pricking some nerves about the state of the European Union and its economy. But the lack of event risk, dearth of corporate reports, and limited external news managed to keep negative sentiment in Asian and European trade relatively mooted, leading to a mixed day for Asian shares, and a generally solid-one for Europe’s.
    Trade War escalation in US trade: True to form however, the cautious optimism of market bulls has been kicked-down again late in Wall Street trade, as news filtered through the wires that the Trump Administration intends to slap additional tariffs on Chinese imports if talks between US President Donald Trump and Chinese President Xi Jinping at next month’s G20 fall by the wayside. Early price reactions to the news were of course negative, proving enough to wipe the session’s early gains from the Dow Jones, NASDAQ and the S&P500, while turning the tide of positivity in futures markets into a state of vigilance. Upon their close, US stocks have dropped in the realms of one-percent, setting a tone to the week’s trade very much in line with last week’s.

    The Trumpian approach: It’s hard to pick the rationale of the Trump Administration and its hard-headed approach to China. In the hysteria to point-out President Trump’s characteristic buffoonery, it is often lost that several legitimate concerns exist regarding China and its behaviour as a global economic citizen. Some sort of response to anti-competitive trade practices and the like from China is perhaps overdue, but the question is whether the Trump Administration’s approach is one designed to really achieve results. The Chinese despise backing down to a foreign power, wishing – as is widely stated about Chinese culture – “to keep face”. Waving a big stick at the Chinese is sure to only make them more stubborn and delay any material change.
    US mid-terms: Perhaps the approach can be viewed cynically as a populist-play ahead of US mid-terms to fire-up the American public – and more specifically, Trump’s core constituency. Votes are cast for Congress in slightly over a week, and it is shaping up as a test of Trump’s legitimacy. Talks of a Democratic “blue wave” washing over the US Senate and House of Representatives would surely have the White House concerned -- an outcome that, if witnessed, would surely shift Trump’s power-base and policy platform. It’s something the Chinese will be monitoring closely: a Republican thumping in the mid-terms could be seen as a vote of no-confidence in the White House, and potentially by extension, a vote of no-confidence in President Trump’s belligerent approach to foreign policy.
    Risk-off on a protracted trade-war: Nevertheless, a protracted trade-war, based on the balance of evidence, seems likely – a fact last night’s developments dutifully reminded market participants.  Backing-up some stark guidance from US industrial giants last week about the profit-eroding impacts of the trade war, the effects on equity markets of the possible introduction of new and bigger tariffs will be lingering. Haven assets furthered their bid higher on this basis, adding to their short-term spike: the yield on benchmark US 10 Year Treasuries fell again to 3.07 per cent, pushing the US Dollar higher across the board. Naturally, the stronger greenback and heightened risks to global growth has pushed the AUD/USD lower, to trade back towards the recently penetrated support level of 0.7040.
    China can’t take a trick: Last night’s new trade-war salvo can’t be good news for Chinese equity indices today, especially after China’s stocks were the great underperformers during yesterday’s Asian session. Though there was no overt news to precipitate it, Chinese indices took another bath in trade yesterday, tumbling 3.05 per cent (if using the CSI300 as the benchmark). Despite quite attractive valuations and policy makers full bore attempts to support stock markets, the power of sellers has proven too overwhelming for China’s equities. While the fundamentals are surely not as bad as price action suggests, very little impetus apparently exists for investors to jump-back into Chinese stocks right now. Adding to the bear base, the technicals suggest that (on the daily charts) that the market isn’t yet entirely oversold, meaning a plunge below recent lows at 2980, down toward support at 2900, is a possibility.

    ASX today: SPI futures are indicating that the ASX200 is in for a considerable dump at market open of around 78 points. There was an element of hope amongst investors yesterday that the strong activity in Australian shares was the turning point bulls had been waiting for: the momentum/growth plays in the health care space lead the ASX higher, while the sectoral map showed gains in every sector on market-breadth of 69 per cent. To the assumed vexation of the bulls, last night’s trade war developments are poised to erase yesterday’s bounce, reaffirming the bearish tone to trade on the Australian share market. And (arguably) justifiably too: the ASX200 remains oversold, implying bounces are necessary on the path of this trend lower – the dynamic of which is being perpetuated by a set of bearish fundamentals, that have not yet changed.
  12. MaxIG
    Wall Street pulls back: On balance, and with Wall Street a few hours from ending its session, it's been a soft 24 hours for equities. The often heard calls of a looming "new-peak" in the market in the shorter term can be heard from some. Momentum has certainly slowed down. The S&P500 has its eyes one 2815 again - that crucial area where that index sold off on three occasions from October to December last year. It could be a slow drive to arrive at a challenge of that level now. The dovish Fed will keep the wind behind US stocks; but the earnings outlook, post reporting season, has dimmed on Wall Street, while positive regarding the trade war has already been heavily juiced.

    Trade war truce already priced in? Markets are positioned for a relatively positive outcome in the trade-war, and that's manifesting in pockets of market activity. A true resolution in the trade war isn't expected, however an extension to be March 1 trade-truce-deadline seems to be. The overnight fall in US Treasuries, coupled with a topside break of copper's recent range, is a testament to this sentiment. The yield on the US 10 Year note has jumped back towards 2.70 percent, while the 3 month copper contract on the LME leapt another 0.83 per cent overnight. In G4 currencies, the US Dollar is stronger against the Euro and Pound, albeit very, very marginally, but weaker against the Yen.
    The curious case of gold: Gold prices have dipped slightly courtesy of the stronger Dollar and greater confidence in the policy-outlook for the world's major central banks. The price of the yellow metal is sitting just above $1325 presently, as it continues its short term trend higher. One of the more divisive debates amongst traders currently is the outlook for gold. Like any market, time horizons are crucial to illustrating the trend for an asset's price. For gold, the short term trend is certainly higher, but with signs of "toppy-ness". The medium term trend, though perhaps posting some higher-lows in the price, is sideways at best. The long-term, secular trend though for gold prices is irrefutably pointing higher.
    The gold debate: There is several aspects of this price dynamic, and elegantly indicates the different types of traders that move a price over certain time horizon. The immediate-term outlook for gold is naturally speculative, and pertains to the swings-and-arrows relating to stories about the trade-war, global growth, and short term rates. The medium term activity in gold certainly tracks the changing yield environment and vacillations in the credit and monetary policy cycle - primarily of the Fed. In the longer-term, where time scales of decades are spoken of, gold prices are angling higher, seemingly as global central banks buy the metal to hedge their US Dollar dependence.

    Global growth outlook dims further: At the risk of flying off into paradigm after paradigm: a health check on economic data from the past 24 hours is in order. A mixed bag of data pertaining to global economic growth shaped the "global growth narrative" last night. It was a big PMI day in Europe and Asia, and while there weren't as many shockers, the numbers showed a greyer outlook for the global economy. Japanese Manufacturing PMI deeply contracted once more, Australian PMI figures dipped, while European numbers were relatively better, however did little to ameliorate the concern that European growth is sliding. It was a notion backed-up by last night's ECB minutes: policy makers can see what's happening to growth, and now future monetary policy is on notice.
    Australia's wise-old uncle calls RBA cuts: Centring on the Australian experience, and a headline grabber yesterday was the Australian Dollar's wild ride. Labour market figures popped a rocket under the Aussie in early trade, after it was revealed that the local economy added 39k jobs last month - enough to keep the unemployment rate at 5 per cent despite, despite a climb in the participation rate. It all came undone for the currency quite quickly, however, after Australia's wise-old-uncle on RBA policy, Bill Evans, announced his view that a forecast fall in domestic GDP to 2.2 per cent and a subsequent rise in the unemployment rate to 5.5 per cent would prompt to RBA to cut rates to 1.0 per cent this year.
    ASX to open soft: To add insult to injury, the AUD/USD was slapped down below 0.7100, after China announced a ban on Australian coal imports. This story aside, which dropped after the ASX200's close, the fall in the currency, and the fall in Australian Commonwealth Government bond yields, proved a positive for the ASX200. It closed   0.7 per cent higher for the session at 6139, and now eyes the next resistance level around 6160. The developments regarding the ban on Australian coal going into China, concerns about Australian fundamentals, and a bit of selling into the close on Wall Street should drag on stocks today. SPI futures indicating a 4 point drop for the ASX200 this morning.
    Written by Kyle Rodda - IG Australia
  13. MaxIG
    Written by Kyle Rodda - IG Australia
    The tone of overnight trade: All eyes back on the fundamentals – that’s the attitude now. The post US mid-term election rally stalled overnight, as investors turn their attention to this morning’s US Federal Reserve meeting. The Fed have kept interest rates on hold – that much was already baked into the price. Market activity to close the week will primarily be dictated now by how market participants interpret the language in the Fed’s accompanying policy statement. It’s been considered rather neutral thus far, and for equity markets, that’s not necessarily a positive result. Almost inexplicably, the US Dollar has rallied upon the release, despite very little new information being revealed in the statement. The argument for that may be that given October’s stock market volatility, a more dovish Fed was expected – true to form, this Powel-led Fed is not for turning, apparently sticking to the central bank’s existing outlook.
    Global price action: The conservative-bent to last night’s trade meant that equity markets traded more-or-less flat to lower. Asia provided a strong enough lead to the Europeans, however our region was last to the party in this week’s relief rally, so that meant little to European traders. Europe’s equities were reasonably mixed – generally down on the day. Stable and less risky assets therefore caught a bid, driving global bond prices higher. Bloomberg’s Commodity Index edged quite modestly higher, though both gold and copper traded rather directionless for most of the overnight session. The big mover in the commodity space was oil once again, with the black stuff continuing its tumble. WTI Crude has ticked into the $60.00 per barrel mark and Brent Crude has fallen to the $70.00 per barrel level, as traders adopt the position that there will remain a short-term surplus of oil in global markets.

    Wall Street session: At time of writing, Wall Street is entering its final moments of trade and the Fed’s monetary policy statement hasn’t inspired terribly much bullishness. Volumes are up on Wall Street, which is in stark contrast to European indices, that saw markedly below average volumes during their trading session. Activity in US Treasury markets is strong, with traders apparently judging that the Fed’s position is still one of firm, gradual rate hikes. The yield on interest rate sensitive US 2 Year Treasury note has ticked higher to a new post-GFC of 2.965 per cent, but the yield on US 10 Year Treasury Bond has remained hobbled by the outcome of the mid-week US mid-term election outcome, trading at 3.235 per cent. The spread between those two assets has thus narrowed once more to approximately 26 points.

    Currency markets: Across broader currency markets, the stronger greenback has exerted its influence: The Dollar Index began a rally overnight, and post-Fed has posted daily gains of 0.5 per cent.  The USD/JPY is knocking on the 114.00 handle’s door, while the other popular risk off pair, the USD/CHF, fell to 0.9945. The USD/CAD has rallied, by way of a combination of a stronger greenback, lower oil prices and developing news of another breakdown in trade relations between the US and Canada. The EUR/USD has fallen deeper into 1.13 and the GBP/USD has dipped back to float within the 1.30 (perhaps in part due to the release of UK GDP data tonight). Regarding the latter two pairs, they came under pressure overnight after the European Union warned that the Italian budget deficit is running the risk exceeding the bloc’s limit of 3 per cent. That sent bond spreads wider and placed additional weight on European equities, although the weaker Pound apparently provided a minor leg up for the FTSE100, which finished the session in the green.
    The Aussie battler: The Australian Dollar hasn’t escaped King Dollar’s might this morning, falling to 0.7270 (or thereabouts). The very illustrative spread between US 2 Year Treasuries and the Australian Commonwealth Government Bond equivalent has expanded to 90 basis points. A spread that wide has in recent times precipitated a tumble in the AUD/USD, however it must be remarked that the Aussie battler isn’t trading quite so much on fundamental themes in the market. Improved global growth optimism and heightened risk appetite this week has supported commodity-bloc currencies, but the best explanation for the local units’ rally is an unwinding of short positions in the market. Although this is only a short-term phenomenon, and the fundamentals will likely reassert themselves, the AUD/USD’s break of its trend channel supports the notion that upside to 0.7310, even possibly 0.7450, exists.

    RBA Monetary Policy Statement: The Reserve Bank of Australia’s quarterly Monetary Policy Statement could be one determinant of this move. The document, released at 11.30AM this morning, will be perused by traders for hints regarding the outlook for the Australian economy, and forward guidance from the RBA about its rate hike outlook. It must be assumed that little-less than the rosy picture painted by the RBA about the economy should be expected. This is especially true given the statement accompanying Tuesday’s monetary policy meeting upgraded the central bank’s employment, growth and inflation forecasts. As always, the fine print, hidden meanings and other semantics will dominate the analysis of the document, with interest given to the RBA’s view on the strength of Australian households. Arguably, it’s the combination of high household debt, falling house prices and its impact on future consumption and inflation that is keeping interest hikes on ice, so any indication about these matters could prove significant.
    ASX200 today: SPI futures are indicating today that the sputtering end to Wall Street trade will manifest in a 13-point drop for the ASX200. Yesterday’s trading session was a fruitful one for Australian investors: the local index climbed over half-a-per-cent for the day, led by an 18-point contribution to the index by the financial sector. In positive signs for risk appetite, growth sectors – in the form of health care stocks and IT stocks – topped the sectoral map. The ASX200 closed trade at 5928, just shy of a very key resistance level at about 5930. The failure to break above this mark is telling, but not surprising – and will likely prove a formidable barrier in the future: doing so would be a clear indicator of an (on balance) bullish control of the market, after the bears took the reins during October’s correction.
  14. MaxIG
    US Fed watch: The US Fed meeting has been kickstarted and the markets are shuffling around in anticipation. US equities at time of writing are putting in a mixed performance, though al major Wall Street indices remain trading below key technical levels. It comes following a day in which Asian and European markets sold-off in sympathy with Monday night’s rout in North American shares. A desire for safety has supported a bid in US Treasuries: they are higher across the board. Interest rates traders are also grinding away, pricing out point-by-point interest rates hikes from the Fed in 2019. The US Dollar has dipped as traders take safety in other haven currencies: the US Dollar Index is below 97, mostly courtesy of a play into the EUR and the Japanese Yen. The weaker greenback has provided a lift in gold prices, with the yellow metal trading just below support at $US1250 per ounce.

    The Fed’s biggest critic: Everyone has an opinion on what the Fed ought to do, it seems. The most powerful voice of all, US President Donald Trump, has certainly weighed in on the subject, Tweeting: “I hope the people over at the Fed will read today’s Wall Street Journal Editorial before they make yet another mistake. Also, don’t let the market become any more illiquid than it already is. Stop with the 50 B’s. Feel the market, don’t just go by meaningless numbers. Good luck!” Never mind that President Trump’s policies, from major tax cuts and his trade war have contributed to the Fed’s invidious position. The President clearly is noting his concern about one of his hitherto favourite measures of personal success: the health of the US stock market. Whether rightly or wrongly, market participants, as contained within the price action in global markets, appear to agree with President Trump.
    Market sentiment: Cool it with the hikes, guys! Is the message. Traders obviously can’t take much of it any more. Risk is off the table and bets are being placed that we are in for a “dovish hike”. That is: a hike tomorrow, but a very careful downgrade in the projections for future hikes. It’s an incredibly tight rope the Fed must walk. On one hand, they’ll need to assure markets that they remain accommodative of US (and the globe’s) financial and economic health; while on the other, they can’t seem so accommodative as to reveal a level of genuine fear about what could be in store for markets and the economy in the future. The problem is, markets are going deep on the notion that a dovish Fed is upon us. The possibility is that the markets have set the bar too low.

    The big risk: Thus, even a sprinkling of hawkishness about rates could prompt a big repositioning in markets. The first reaction would be in rates markets, but that would transfer quickly into the prices of US Treasuries. Overnight, the yield on the US 2 Year note and the US 10 Year note dropped by 4 and 3 points, respectively. The spread between those two assets has gradually widened since narrowing to about 9 point a fortnight or-so ago, to sit around 17 points now. The back end of the curve will remain mostly responsive to growth and inflation expectations, but if the Fed adopt a more hawkish line, yields on the 2 Years could rally-hard, re-narrowing spread considerably. Out would come the recessionistas in such an event and the global share market, led by Wall Street indices, could possibly convulse.
    Danger signs still flashing: Highly sensitive market-participants wouldn’t appreciate the shock. Again, in last night’s session, amber lights were flashing in certain segments of the market. Junk bonds suffered the most, with the spread on high yield credit widening to multi-year highs. The dynamic was fuelled by another tumble in oil prices on fears of a slow-down in economic activity will cause a supply glut. Thinner liquidity brought about by tighter financial conditions isn’t making the situation any more manageable. The price of WTI is now at $US46 per barrel at time of writing, having fallen over 7 per cent in the last 24 hours. Energy stocks the world over, not mentioned the Loonie, have dropped, and assets pricing in implied inflation have modestly dipped – portending further difficulty for the likes of the Fed to maintain price growth at targeted levels.

    ASX resilience: SPI futures have been whipping around a bit in late American trade. There’s an hour to go on Wall Street as this is being written, and the major share indices are gravitating back to their opening price. It could be risk is (justifiably) being taken off the table here in anticipation for the Fed. So: futures are suggesting a give-up of 8 points for the ASX200 at the outset, adding to yesterday’s pain. To the credit to the Aussie index, the 5600-level isn’t being let go without a fight. The buyers entered the market yesterday on numerous occasions to push the market above that point, only to be overwhelmed by sellers, who rammed home the overwhelming negative sentiment. Technical indicators aren’t necessarily pointing entirely to sustained downside in the ASX200, but a succession of lower-highs in the past few sessions indicate the bulls could be getting exhausted.
    What’ll save us? Australian equities never became quite as elevated as their US counterparts did over the last decade, perhaps implying if we are entering a bear market, ours won’t be as severe. However, given the share market self-off has been inspired by fears of slower global growth, Australia’s exposure to any wreckage is all but unavoidable. The miners haven’t demonstrated the sort of stress one might expect, but the banks are being belted (they gave up 27 points yesterday), while the health care sector is unwinding the market leading gains of the year and the energy space is falling with the oil price. Arguably the best thing that could happen is a truce in the trade war to ease burden on the Australian economy; however, after Xi Jinping’s defiant speech yesterday, plus the issues of tighter financial conditions, perhaps the benefit of any improvement in global trade relations trade will be marginal.
  15. MaxIG
    Financials drag on the ASX: The ASX200 was legged in the final stages of trade yesterday. It was led by a sell-off in major financial stocks, after a media address made by Australian Treasurer, Josh Frydenberg, during which he announced the Liberal government would not pursue the eradication of trailing commissions for financial advisors and mortgage brokers, as prescribed by Kenneth Hayne QC in the final Banking Royal Commission report. It turned what was an otherwise solid day for the ASX200 on its head. Naturally, given their substantial weighting in the index, a bad day for the banks more-often than not leads to a pull-back in the market. That notion certainly proved to yesterday and looks to prove true again this morning.
    A good lead, but a weak start: Thus, at time of writing, SPI Futures are pointing a 7-point drop at the open. With half-an-hour left in Wall Street trade, it won’t be for a lack of a positive lead that this will be so. It’s been a reasonable day for US stocks, rallying just over 0.3 per cent, according to the S&P500. Market participants, it would seem, have had hurled back at them, when it comes to the banks, the political risk to the industry, they’d thought, had disappeared following the final report handed down by the Royal Commission. This being the case, the simplest answer for the ASX’s likely sluggish start today is this returning shadow of regulatory uncertainty over the financial sector.
    Banks back into the spotlight: Numerous specific explanations could be offered regarding the exact rationale for trader’s sell-off in financial-stocks. Many of them are politically-charged and filled with bias. For some inclined to one way of thinking, it might be because the Government’s new-position invites the Labor opposition to go harder on their “bank-bashing” (as it has become colloquially known) and raised the prospect of harsher regulations on the banks. The overarching explanation, no matter the specific reasoning, however, can be summed up in a cliché about markets: the only thing worse than bad news in markets, is uncertainty. Yesterday’s proclamations from the Government reintroduce uncertainty to the banking industry and create reason to avoid long positions in the banking stocks.

    Some of the bullish stories: Hence, despite some reasons to climb further today, the ASX200 may struggle to stay out of the red. It will come in the face of other macro-factors that ought to support stocks in Australia – and across the region. For one, industrial metals elegantly bounced from trendline support to sustain its recent run higher, which augurs well for the materials sector today. Oil is edging higher once more, so another day of gains for the energy sector could be in store. And a further play into health care and information technology stocks on Wall Street last night suggests an appetite for growth and risk in the market, pointing to positive conditions for highly weighted biotechnology firms on the ASX200.
    US CPI and global yields: Even more fundamentally, risk appetite was galvanized by a general fall in bond yields overnight. While still well within their broad range, US 10 Year Treasury yields fell 4 basis points to 2.60 per cent, after US CPI numbers missed expectations. The headline core CPI figure printed a lukewarm 2.1 per cent – effectively affirming, for now, that the US Fed is under very little pressure to hike interest rates. The knock-on effect was tangible throughout fixed-income and currency markets: 10 Year German Bunds clocked another multiyear low around at around 0.05 per cent; and the USD gave up ground, as it lost some of the yield advantage that has fuelled its recent rally. 
    A higher chance of a Fed cut: Inflation expectations for the US economy have been tempered after last night’s CPI miss. The US 2 Year Breakeven rate slipped below 1.90 per cent – revealing a market that believes that inflation in the US will continue to languish below the Fed’s 2 per cent “symmetrical” target. The dynamic has manifested in the implied probabilities US interest rate markets. A rate cut from the Fed is now considered a roughly 36 per cent chance before the end of 2019. It’s taken market positioning to levels not witnessed since the start of January – that being a time, of course, when the market was still being shaped by the massive market correction experienced in the last quarter of 2018.
    Brexit update: For everything else going on in markets, Brexit and the unfolding drama in that issue was the headline issue for traders overnight. There were many swings in the story yesterday, but ultimately, the simple fact this morning is this: UK Prime Minister Theresa May’s Brexit deal has been voted down again. It was by a smaller a margin this time – a 149 vote deficit. But nevertheless, the defeat was resounding, and ensures that the toxic effect of Brexit on markets lingers. The Sterling has whipped around in a 2.4 per cent range in the last 48 hours. Similar volatility is expected as the House votes tomorrow morning on whether to exit the EU with “no deal” at all.

    Written by Kyle Rodda - IG Australia
  16. MaxIG
    Trump-Tweet #1: US President Trump announced yesterday what had long been assumed: the trade-truce will be delayed, because of the “very productive talks” going on between his administration and Chinese policymakers. Understandably, the formal recognition that tariffs won’t be hiked to 25 per cent (from their current rate of 10 per cent) on $US200bn of Chinese goods stoked risk sentiment. The overall impact wasn’t quite as deep and broad on one might have hoped, however. The reasoning is logical: progress in trade talks, as alluded to, has long been well known. In fact, for several weeks, in a gradually thinning market recovery, it’s been trade-war headlines that have been providing the sugar hit to sentiment to keep this run going at all.
    AUD, RBA and ACGBs: The AUD/USD, and Australian assets, constitute many of the favoured proxies for trading trade-war headlines, and the news’ impact on price action has illustrated nicely the mixed opinion in markets relating to the developments. Yields on short-term bonds are a little higher, but interest rate markets haven't shifted much, while the yield on 10 Year ACGBs has actually fallen to 2.08 per cent, showing that traders are reluctant to price in markedly improved global growth conditions just on the basis of the latest trade war story. As the speculative tool of choice amongst traders to play-with trade war headlines, there has been a noteworthy rally in the AUD, over the last 24 hours, towards resistance at 0.7200.
    ASX200: The ASX benefitted somewhat from positivity stemming from the subsequent climb in commodities prices, along with yesterday’s remarkable ~6 per cent rally in Chinese equities. Breadth across the ASX200 was so-so, with only 56 per cent of stocks clocking gains yesterday. But volume was quite high, especially into the close and during the after-market auction, where most of the day’s gains were achieved. It was the materials sector, naturally, that added most to the index overall: it delivered 8 points to the ASX200. At the outset today, Australian stocks look set to experience a soft start, with SPI Futures indicating a drop of 11 points come the opening bell, mostly due to a pull-back in commodity prices last night.

    Trump-Tweet #2: That’s not to say the commodity complex has broadly suffered in overnight trade: copper is still higher, with many other industrial metals. It’s been a tumble in oil prices that’s weighed on commodity markets, courtesy – as is typical – of a Trump-Tweet. The US President has a thaw in his side about oil, calling for OPEC, in the face of rising prices, to “relax and take it easy”. Oil was probably getting a touch overbought, so a catalyst to push prices lower need not to have been a big one. What this story shows though, is how seriously traders take the President’s influence on OPEC, especially given the reportedly close ties between the White House and the Saudi royal family.
    Trump-Tweet #3: If US President Trump hates higher oil prices, then he loves a climbing stock-market with the same vigour. Another Tweet last night: “Since my election as President the Dow Jones is up 43% and the NASDAQ Composite almost 50%. Great news for your 401(k)s as they continue to grow.” It’s hard to argue against the notion that this US President sets policy with the stock-market front of mind. Trump’s enthusiasm hasn’t stoked buying activity in the S&P in the same way that the extension of the trade-war détente has, but it does raise the question of whether, along with the recently exercised Powell-put, a “Trump-put” now exists somewhere against the US stock market, as well.

    From Trump to Powell: Sometimes it feels this is just US President Trump’s financial-world, and all we are doing is living (and trading) in it. It’ll be welcomed by many, surely: the US Fed’s view on the US economy and financial conditions will progressively shift into focus today. Fed-Chair Powell is due to testify before congress tonight (AEDT), kicking off several days of speeches and testimonies. The S&P has been powered along by the Fed’s recent back down on rates, and market pricing suggests that few believe a hawkish Fed will return in this cycle. As for US stocks, while the recovery is still intact, major resistance is looming at 2815, with diminishing volumes suggesting conviction in the market is slowly waning.
    Currency markets’ holding pattern: As for the almighty Dollar, it’s off its highs, which isn’t a bad thing for US markets and the US economy. Zooming out to the wider picture, and the US-Dollar is sitting comfortable in the middle of its multi-decade range. There’s a holding pattern going on in currency markets at present, underpinned in large part by a range bound EUR/USD. 10 Year Treasury/Bund spreads aren’t showing much life either, curbing volatility, although the overall trend in markets is bullish government bonds. The shifter in currency land overnight was news that UK Labour leader Jeremy Corbyn will back a 2nd referendum on Brexit, powering the Cable above 1.31, as traders back their bets that Brexit will indeed be delayed.

  17. MaxIG

    APAC brief 20 Mar

    By MaxIG,

    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
  18. MaxIG
    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.

    Written by Kyle Rodda  IG Australia
     
  19. MaxIG
    ASX edges higher: The ASX200 edged higher yesterday, as what is a technically overbought market recovered some of its Friday losses. Upside momentum has clearly cooled for the local stock market, ahead of a week heavily geared towards positioning for this weekend’s G20 meeting. Overall, it must be said it was a low impact and low activity day’s trade yesterday. Consumer stocks were most responsible for the day’s losses, sapping around 4 points from the ASX200, while Real Estate and bank stocks lead the market’ gains, following signs of improvements in clearance rates over the weekend in the Melbourne and Sydney housing markets. 

    Aussie Dollar pops on RBA comments: The Australian Dollar experienced a little lift to kick-off the trading week. A short-term phenomenon, for sure, the local unit climbed following comments made by RBA Governor Philip Lowe at a panel discussion yesterday morning, that “… it’s legitimate to ask how effective more [monetary policy] easing would be”. Though certainly not a statement about future policy, the comments did have the small effect of leading traders to briefly unwind their bets for future rate-cuts from the RBA, boosting the AUD. Currently, the market is pricing in a 77 per cent chance of another interest rate cut next week.
    Dr. Lowe’s policy prescriptions: Perhaps only for the econo-nerds: Governor Lowe did make some interesting statements about Australia’s future economic management, the role of monetary policy in the economy, and what might be required (the world-over) to support long-term economic health, yesterday. Reiterating what he’s implored in several of the RBA’s recent communications, Governor Lowe suggested that government should be “full of ideas” for large-scale fiscal and structural reforms, as a means of underwriting economic growth moving into the future. And the strong implication was that, with long-term borrowing rates at historically low levels, the time for such reform is now.
    The (true) dead hand of government? It makes for a pertinent debate: what and/or who is best at managing and growing the wealth of a nation? Demonstrably, the onus, since the Global Financial Crisis, has fallen disproportionately upon central banks to manage the economic fortunes of society. Though flawed, the historical process behind this quasi-system is explicable. Years of fiscal profligacy in Europe and the United States, particularly leading into the GFC, has rendered governments in those economic regions more-and-more impotent. This has created an over-reliance on central bankers to compensate for the noteworthy lack of fiscal firepower possessed by these governments, and sustain global economic wellbeing.
    Australia’s fortunate position: Central bankers, most pertinently at the Fed, ECB and BOJ, have thus (arguably) gone beyond their traditional mandate of price stability and full employment to ensure they achieve the tacit objectives outsourced to them by government. But, going back to Governor Lowe’s commentary yesterday, herein lies the rub of this for the Australian economy: owing mostly to good fortune, Australia’s fiscal position is relatively strong. That means that the RBA shouldn’t and needn’t be relied upon the same way other nations rely upon their central banks. Our government can do some of the heavy lifting – provided it can spend the money in productive ways.
    Another night of subdued trade: In overnight trade, markets were characterized by a small case of Monday-it is. Perhaps one could call it the hangover from such a big-week last week. Wall Street has traded on low activity, with the S&P500 continuing to dance around its all-time highs. Sovereign bond yield in North America and US fell once again, as markets maintain their move to price rate-cuts around the globe. The USD has remained offered. Falling yields and the weaker Dollar has pushed gold to fresh highs around $1420. And what it all implies for the ASX200 today: SPI Futures are pointing to a roughly 14-point drop this morning.
    Crypto’s spark-up: Crypto-currencies are experiencing a new lease-on life, with Bitcoin climbing above the $US11,000-mark for the first time in 15-months. Bitcoin has apparently benefitted from a handful of factors in the past month-or-so. For one, the prospect of imminent rate-cuts from central bankers across the globe is fostering both greater risk-taking, as well as a desire to diversify exposures to traditional, fiat currencies. On top of that, and perhaps more importantly, the re-escalation of the US-China trade-war, plus heightening geopolitical tensions across the globe – especially in the middle-east – is boosting the appeal of methods of payment and exchanges that skirt economic sanctions, and other regulations.

     
    Written by Kyle Rodda-IG Australia
  20. MaxIG
    Global stocks: Global equities will be forced to prove their mettle this week. Price action suggests that for many equity indices, the market is ambling at a cross-road. The macro-economic challenges moving markets in general haven't been resolved. That remained true during last week's trade, which saw global stocks move higher, in general. The difference this week is there are more numerous and higher impact risk-events that could make or break the stock market's recovery. There will be no shortage of potential catalysts to move markets, in the short term, into its next phase. Opportunity for both upside and downside exists. Though given the one-way run experienced on Wall Street, perhaps it should be judged that the risk is skewed slightly to the downside, for now.
    US market’s cross-roads: The will of the Bulls was under scrutiny in the latter part of last week. The lingering question has yet to be answered: are we experiencing a recovery, or will this be a faded rally? The S&P500 couldn't manage to break the big-psychological resistance level of 2600. The bulls appeared to simply stall on Friday, with the US market according to the S&P500 closing a very narrow 0.01 per cent lower. Friday's trade amounted to the only negative session for the major-US stock index for the week. The upside-momentum is apparently waning for US equities. The VIX is lower it must be stated, so fear is diminishing in the market. But perhaps confidence is still rattled somewhat by December's market-rout.

    Reporting season looming: A decision to push the market higher or let the recent rally fade must be imminent. Short-activity, according to IG's data, is gradually building in US indices. There will be no room to hide shortly, as traders prepare for the kick-off of reporting season this week. In total, earnings growth is increasingly expected to slow by more than first-assumed. The overriding concern in markets presently is given the weaker macro-economic outlook whether the growth expectations of US corporates will diminish in-turn. The first week of the reporting season is dominated by bank earnings: fittingly enough too, given its the banks that could prove the canary in the coal mine for any fundamental problems in the market and the US economy at large.
    ASX200: Once again, the ASX will likely trade in the slip-stream of US stocks this week. SPI futures are indicating a 15-point jump at today’s open, according to the last traded price on that instrument. Like US equities, the conviction of the bulls in the ASX on Friday demonstrated signs of diminishing. The 5800 level is for the ASX200 what is 2600 is for the S&P500: a significant psychological barrier that is coming to represent the difference between recovery and a fading rally. The technicals for ASX200 are looking softer, based on Friday’s market-activity. Breadth was a tepid 37 per cent and volumes were 36.60 per cent below the 100-day average, as the index shed 0.36 per cent to close at 5774 to end the week.

    Australian Retail Sales: Sentiment towards Australian economic fundamentals were bolstered on Friday, despite the ASX’s retracement. Domestic Retail Sales data surprised to the upside, printing 0.4 per cent m/m compared to the forecast 0.3 per cent. Below the surface, the numbers weren’t as strong as the headlines betrayed: the driver of the solid figure was probably the transitory effects of the Black Friday and Cyber Monday promotional periods. Moreover, annualized sales growth fell to 2.8 per cent, from a previously 3-and-a-half per cent. Irrespective of those details, consumer stocks climbed on the news. However, the implied probability of a rate-cut from the RBA increased slightly to around 30 per cent –  though the Australian Dollar did mask this fact, which rallied above 0.7200, in-line with the Chinese Yuan.
    Brexit’s meaningful vote: As any market participant would be aware, in this market, any number of surprises can jump-out to rattle traders. Assessing the calendar and data-docket for the week ahead though, little comes close to challenging the mid-week “meaningful vote” on Brexit in UK Parliament as the most significant scheduled event. To put into the context of prevailing sentiment, aside from swings in UK and European rates and currencies, the subject of Brexit has been down the list of trader’s biggest concerns. It makes sense: global growth and Fed policy has far greater economic impacts, while the US-China trade-war is the more pressing geopolitical issue. Nevertheless, Brexit and its implications are an ongoing concern, with the result of Wednesday’s parliamentary vote to influence trader’s outlook for the global economy in 2019.
    A weaker outlook for Europe: It’s expected that UK Prime Minister Theresa May’s Brexit-bill will fail to pass the House of Commons. Assuming it does, from there markets are confronted by a series of unknowns. There’s been talk of Labour tabling a no-confidence motion in May and her government; or perhaps even a general election or a second referendum. The balance of risks remain irrefutably to the downside for markets out of this event. The area which ought to worry economic-boffins is, amid what looks like a protracted Brexit-campaign, is Europe’s economy looks headed for a marked slowdown. Although its GDP figures surprised to the upside on Friday, boosting the Cable and UK gilts, the UK’s manufacturing data revealed a considerable contraction in activity, adding to a slew of very weak manufacturing numbers across the European continent.
    Written by Kyle Rodda - IG Australia
  21. MaxIG
    A game of chicken: Did Powell just blink? That’s how last night’s speech from the Fed chair is being interpreted. Debate has raged whether in the face of financial market turmoil, the Fed will be forced to cool its rate-hike rhetoric. Powell’s speech – and this is speculative – may have represented this. Gone was the talk of rates being “a long way” from neutral, and that rates may need to move “past (the) neutral” rate. Instead, it was replaced with the key comment interest rates are “just below” the neutral range, and that future rate hikes, as Fed Vice President Richard Clarida implored yesterday, will be “data dependant”. Perhaps we saw last night, in the tradition of many-a Fed Chair gone before, the latest incarnation of a “Fed-put” – that is, this time around, a “Powell-put”, which will underwrite financial market strength at the first sign of true-trouble.
    Rates and bonds: The reactions in financial markets have been predictable, but assertive. US Fed fund futures suggest that traders have heard enough to justify pricing in an 80 per cent chance of a Fed-hike next month. But naturally, the shifting of expectations has been seen in the pricing for rate hikes in 2019. The Fed’s last dot-plots implied 3 hikes for next year – and markets got close to pricing the full three at stages only just over a month ago. We are now seeing just the one, and for some very dovish folk, even that’s too bullish. The short end of the US Treasury curve is manifesting the shift in sentiment: the benchmark 10 Year Treasury note is yielding 3.05 per cent currently, but the yield on interest rate sensitive 2 Year note has fallen back to 2.80 per cent, taking the spread between those two assets back to 25 basis points.
    Currencies: The US Dollar has been ubiquitously dumped by extension of the fall in rate expectations and yields on US Dollar denominated assets. Even despite no sort of counterbalancing good news to prop-up any of the other major world-currencies, the effect of the weaker green back has been spread evenly across the G10 heat-map. The GBP and EUR, which are in as vulnerable a place as ever due to ongoing Brexit drama, are up to the 1.2840 and 1.1380 levels, respectively. The traditionally risk-off Japanese Yen has appreciated slightly, as did gold, which is trading at $US1228 per ounce, and the embattled Chinese Yuan climbed to fetch 6.93. While the highly liquid risk-proxies, the New Zealand Dollar and Australian Dollar, have spiked to 0.7320 and 0.6880, respectively.

    Equities: The greatest action of course occurred in Wall Street equity markets post-Powell’s speech. The major indices have sky rocketed on the relief that discount rates may be steadying their rise and the tightening of monetary policy conditions may be nearing its zenith. It was the high-multiple, growth and momentum stocks that led the charge, predictably. The NASDAQ – at time of writing, with about an hour left in the US session – has rallied 2.30 per cent. The mega-cap laden Dow Jones is also up over 2 per cent, while the comprehensive S&P500 is up by just under 2 per cent. European indices missed out on the fun, closing well before Powell’s speech. However, futures markets are exhibiting early signs that European markets will join their North American cousins in the relief rally upon their open later today.

    When bad news is good news: Maybe this a grand statement inspired by the major plot twist markets experienced overnight, courtesy of Fed Chair Powell’s dramatic change of tact, entering the last stanza for financial markets in 2018. But the price action and sentiment shift seen in last night’s trade does appear a microcosm of the perpetual battle faced by central banks for perhaps decades, if not at the very least, since the Global Financial Crisis. Asset markets appear dictated not by fundamental strength in the macro-economy, but by the central bank-controlled credit-cycle that investors have come to rely upon for their investment cues. It’s a contentious debate, and one that hasn’t been resolved. However, last night’s developments hark back to years gone by when bad economic news was judged to be good news for financial markets, and good economic news was judged to be bad.
    Let the good times roll? Without delving too deeply into the philosophy behind the idea – although suggested reading would include the work of Hyman Minsky – the contradicting information received last night pays heed to this notion. Aside Fed Chairperson Powell’s speech, overnight there was a raft of news that highlighted the world is experiencing slower economic growth, and that the global economy has quite possibly reached peak growth for this cycle. A speech for BOE Governor Mark Carney highlighted the dire economic consequence to the UK economy in the event of a no-deal Brexit. US GDP came in a smidgeon below forecasts and affirmed the view the US economy may gradually slow-down in 2019. And Christine Lagarde, the Managing Director of the IMF, stated last night the global economy may be slowing faster than expected. Nevertheless, Fed policy hogged the limelight, with the prospect of marginally more accommodative monetary policy conditions inspiring risk-on behaviour all the way from, credit, to bonds, to equities, to currencies.
    The ASX: SPI futures are pointing to an ASX200 that will relish the global relief rally today. The ASX200 ought to jump about 30 points at the open, likely breaking through 5745-resistance in the process, and opening upside to the next key level at about 5780. Volumes have been quite high across the ASX this week, and to the presumed delight of the bulls, the strength is demonstrating signs of running deep. For one, although the ASX200 was down 0.06 per cent for the day yesterday, it was the small and mid-cap stocks demonstrated the most upside. Really, it was the materials space once more, confronting falling iron ore prices, that sucked 6 points from the index yesterday and was responsible for the markets weakness. Overall, a true bullish turnaround is still some way off, but the chance of a true turnaround in the market has increased meaningfully overnight.

     
  22. MaxIG

    APAC brief 23 April

    By MaxIG,

    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.

    Written by Kyle Rodda - IG Australia
  23. MaxIG
    Written by Kyle Rodda - IG Australia
    Time to give thanks: It’s Thanks Giving in the US, so US traders are away from their desks and equity markets in the country are offline. Perhaps it’s something the bulls can be thankful for: the holiday has resulted in very thin volumes across the globe, giving a subsequent ability to take pause from the unfolding market rout. There is so much information awaiting market participants coming into the end of November and start of December, so surely the opportunity to distract oneself for now by gorging on roast turkey and a few beverages of choice is being welcomed by our American cousins. Presumably, little can fix for too long the underlying anxiety caused by the myriad of fundamental concerns plaguing investors. But that’s next week’s problem, for now – better that we take stock while the American punters sift around for reasons to give thanks.
    Global equities: To capture a theme from last night’s trade: it was – for all intents and purposes – about Brexit. Before delving into that one, let’s take a check on the price action. European equities were down across the board. The volumes for the continent were, as has been touched on, remarkably thin, except for the FTSE, which was down 1.28 per cent on the unfolding Brexit drama. The DAX clocked in a loss of 0.94 per cent for the day, unable to grasp the lead from the Asian region’s mixed but respectable trading day, which saw the Nikkei up 0.65 per cent and the Hang Seng up 0.18 per cent, but the CSI300 down 0.37 per cent. In our local session, the ASX200 was another index that bucked the trend of low activity, continuing its bounce off support around 5600 to close 0.86 per cent higher on volumes 10 per cent above the 100-day average.

    Bonds, currencies and commodities: The US Dollar was weaker, largely due to the bidding higher of the Pound and EUR, with those currencies leaping above 1.28 and 1.14, respectively. The weaker dollar also supported gold, which is trading back at $1227 per ounce. US Treasuries are flat due to the Thanks Giving holiday: the yield on the US 10 Year note is 3.06 per cent. Dulled risk appetite has meant the Yen is modestly stronger, trading just below 113 at time of writing; and the Australian Dollar is off a touch, trading slightly above 0.7250, in tandem with the New Zealand Dollar, which is just holding onto the 0.6800 handle. Oil prices have dipped again, falling about 1.4 per cent, dragging the Canadian Dollar with it; while copper is a little higher for the day.
    Brexit developments: Back to the pressing issues at hand, and the lack of data combined with closed US markets has meant Brexit developments have taken centre stage. In what's been judged a positive step-forward by markets, Donald Tusk, President of the European Council, announced overnight that a draft Brexit proposal had been "agreed at a negotiators level and agreed in principle at a political level" amongst European Union leaders. The news is what sent the Pound on a tear -- and the FTSE100 lower consequently -- following yields on UK gilts, which of course rallied courtesy of the optimism engendered by the announcement. The stage is now set for this weekend's EU economic summit, where it's now very much assumed European leaders will rubber-stamp the Brexit proposal.
    What are the chances? For all the hope that a Brexit deal can be reached, the stark reality is that UK Prime Minister May faces an uphill battle. In what must have been a gruelling three hours or so in front of the House of Commons, the Prime Minister delivered a speech and then fielded questions from parliamentarians on the Brexit proposal. There is such division and disparity in the British Parliament about what Brexit ought to look like, that the likelihood any proposal could unite the very many different and opposing interests appears slim. A no-deal “hard Brexit” remains the probable outcome, spelling trouble for UK and European markets – especially the Pound. How low the Cable could go in this event is difficult to predict: recent lows around 1.2750 would just be the beginning – perhaps the January 2017 low of 1.1990 could be considered the bottom of the range.

    ASX200: Bringing it back home, now: SPI futures are presently indicating the ASX200 will open 29 points lower this morning. It would be awfully surprising if volumes on the Australian share-market bucked the trend today and were anywhere near average. A rudderless market may emerge, whereby trade is choppy, momentum low and price action contained – particularly after yesterday’s relief rally, that added to the bounce by the index off recent lows around 5600. The fortunes of the ASX going forward will inevitably be tied to the themes that emerge from US markets, and as it stands that strongly implies further difficulty for Australian shares. However, the silver lining investors and the bulls may wish to cling onto is the notion that our share market was nowhere near as elevated as that of the US’s, so falls from here may not be as steep.
    ASX: the bigger picture: Once more: that 5600-mark is significant. It amounts to the bottom of a range that was established in 2017 and held steady several months, in what might now be safely described as the markets “accumulation phase”. From the end of that phase in October 2017 to now has seen the registering of a new decade long high, then – in recent months – a strong correction of that move. It suggests a medium-term cycle has been completed, and a bearish impulse has now seized control of the market. The strength of that move ought to be watched for, but the broader global economic slow-down and the peak in the US market suggests a follow through 5600 is highly possible moving into 2019. The broader, secular bullish trend provides the trading channel to work within and judge the bigger picture, with the 5375-level representing the bottom of this trend-channel.

  24. MaxIG
    Written by Kyle Rodda - IG Australia
    US traders return: It’s nice to be back to some normal programming. The big-wigs on Wall Street have returned to their desks and volumes across the market are looking far healthier. After last week’s sell-off and volatility, and well before the meaty part of trade this week, traders appear to have had their appetite for risk whetted. Only slightly, of course: there is an acute awareness that the next seven days will hurl up some major events and some significant uncertainty. However, the VIX is off its highs and below 20 once again, and riskier assets are feeling some love. There were patches of underperformance yesterday, naturally – our ASX200 happened to be one of them, along with Chinese indices – but as it applies to most the major indices, a healthy coat of green is covering the screen to kick-off the first 24 hours of the week’s trade.

    Asian session: The tide turned during the Asian session, with no true impetus behind it. If anything, the fundamentals we received during Asia’s trade made for ugly viewing: Japan’s Flash Manufacturing PMI data was released, and that disappointed markets, adding to fears of slower global growth; while New Zealand Retail Sales figures put-in an abominable showing, printing flat quarter-on-quarter versus expectations of a 1.0 per cent expansion. They were non-stories, though, in the ultimate context of yesterday’s trade, as futures markets pushed-higher on pricing of a solid start to the week for equity markets. Some macro-excuses to buy stocks did arrive in the European session, when reports that Italian policy makers were reviewing their maligned budget filtered through markets, compounding the slight lift in confidence engendered by the weekend’s rubber-stamped Brexit deal.
    European trade: Across European indices, the DAX jumped 1.45 per cent, the FTSE climbed 1.20 per cent, and the Euro Stoxx 50 1.13 per cent.  Bond yields edged higher across the Continent and throughout North American, while the positive developments in the Italian fiscal crisis narrowed the spread between German Bunds and Italian BTPs. The fall in US Treasuries saw the yield on the 10 Year note easing to 3.06 per cent and the yield on the 2 Year note to 2.83 per cent, narrowing the spread between those two assets to approximately 23 basis points. The higher yields supported the US Dollar, which returned to the 97-level according to the US Dollar Index. The Japanese Yen was the biggest loser of the major currencies, dropping over half-a-per cent to trade within the middle of the 113-handle; however, gold, the Euro and Pound traded relatively stable.

    Wall Street: At time of writing, US stock indices are on the cusp of registering quite a solid day. Volumes are higher on average too, reflecting that there is some substance behind what is being dubbed as a "relief rally". It's more a bounce to be fair – the kind we've seen before since the global stock market correction took hold. Nevertheless, for the bullish and opportunistic, it's justifiably proven a respectable 24 hours. US tech stocks have lead the market higher, supported by a bounce in oil prices, which have helped narrow corporate credit spreads and spur greater appetite for risk. The troubles for tech-stocks and oil haven't passed yet -- the big picture hasn't changed -- though (just maybe) there are signs that the bearishness driving the downside in those assets is abating.
    ASX200 yesterday: The action in financial markets in overnight trade has SPI futures indicating a 44-point jump at the open –  a dynamic if realised, will regain yesterday's session's losses from the opening bell. Activity was quite high on the Australian share market yesterday, with volumes approximately 5 per cent above the 100-day moving average. The liveliness in markets was predominantly driven by a dumping of the mining stocks, which were pummelled by the considerable sell-off in iron ore, following the plunge in steel rebar futures over the weekend in response to greater concerns about Chinese economic growth. Overall, the materials sector was responsible for a noteworthy 25 points of the ASX200's losses during the day’s trade, with the likes of BHP and Rio Tinto sliding just over 3.5 per cent.
    Aussie Dollar: The circumstances also led to a slight pull back in the AUD/USD, which generally has lost some of its lustre. Upside momentum has slowed, as the pop higher brought-about by a squeeze on traders’ short positions looks to have stalled, if not subsided. Macro-fundamentals have eased the pressure on the AUD/USD in November, as traders unwind their bets of an aggressive Fed in 2019: the yield-spread between the interest rate sensitive US 2 Year Treasury note and the 2 Year Australian Commonwealth Bond narrowed to as little as 75 basis points. That has expanded once more, but with heightened volatility in the markets and sentiment interfering with fundamentals, a crude assessment of the Bollinger Band suggests that the myriad of macroeconomic risks in the next month could see the AUD/USD move within a broad range between 0.7020 and 0.7450 into the medium term – with the local unit currently smack-bang in the middle of that range based on the weekly chart.

    ASX200: Looking ahead: Now that financial markets have returned to a normal state, getting a gauge on sentiment becomes considerably easier. Positioning will begin taking place across asset classes for the series of US Fed related events in the next 4 days, combined with the weekend's major G20 meeting. The implications for the breadth of global markets are seemingly endless, but as it applies to the ASX200, the outcome of both concerns is profound. IG client sentiment is giving generally bearish signals presently – something that will only become further entrenched if the Fed come-out more hawkish this week and US-China trade negotiations deteriorate. Support at 5600 (give or take) will be where the bulls will be hoping for a floor in the event of a worst-case scenario; while a bullish break-out can't be confirmed until at least 5930 is breached.
  25. MaxIG
    Written by Kyle Rodda - IG Australia
    Friday’s trade: Activity in global markets was more settled on Friday. There isn’t a consensus yet whether the trading witnessed last week was a dead-cat bounce, or a true bottom. Nevertheless, perhaps the lack of substantial news flow was enough to keep the bulls and bears from clashing heads for one day. The ASX200 impressed the bullishly inclined, albeit once again on thin trade, to add 1 per cent during the Asian session. The index managed to chop through the cluster of resistance between 5600 and 5630, to end the week at 5654. The rest of the Asian region put in a mixed performance, with China’s market finishing 0.44 per cent higher and Japan’s Nikkei ending 0.31 per cent. Europe fared well, ending its week in a sea of green, while US indices were also mixed.

    Final day of 2018: Today is quite obviously the last trading day of 2018 and it caps off an extraordinary month – and an extraordinary year, at that. A reliance on the calendar as a way of defining and measuring market success is shallow. But for purely rhetorical purposes: who would have thought that a year that would contain two all-time highs for Wall Street would culminate in a negative year for global equities? In a similar vein: what about the gang buster earnings, and white-hot economic growth – does this seem like the end of a year that contained both those things? It’s reductive to distil the year’s market action to those two points, however it does highlight how unconventional and sometimes strange this year has been in global markets.
    Volatility: The year was much about the return of volatility. Volatility is a measure of fear, and fear is a function of uncertainty. Uncertainty breeds confusion, and the behaviour in financial markets at present is reflecting a state of confusion. It stands to reason and doesn’t necessarily need to induce pessimism. A collective view on the state of the world is absent – good, bad or otherwise, the aggressive swings in equity markets last week is a function of market participants seeking to price-in the most accurate representation of the financial world right now. Such a representation is far from being fully formed, and its shape is being pushed and pulled by opposing ideas and views. Until the will of either the bulls or bears can overcome the other, swings in markets, in an environment of tightening financial conditions, will continues into 2019.

    Bulls, bears and the Fed: Fundamentally, there is a disagreement between the bears and the bulls about future global growth and financial conditions. On the one hand, the bulls suggest the sell-off is overdone, and prices have corrected approximately to where they ought to be. On the other hand, the bears are of the belief that this sell-off has more to run, and that prices remain distorted. The logic begins with the US Federal Reserve, and market views on what the Fed will and ought to do, then expands to the many other major issues impacting market sentiment from there. A great many think that the Fed is overestimating the strength of the US economy and will lean on it in such a way that it will exacerbate a looming economic slow-down – so much so that Fed hikes have been effectively priced out for next year.
    Risk-off, anti-growth: It’s been over a week since the December 19 Fed meeting, and the central bank’s next meeting isn’t until January 31st, opening-up the chance of an uncertain and volatile month. In equities, beginning on Wall Street, the foundations of major turbulence are in place. Traders are bidding up safe-havens, and pricing out higher global interest rates, pushing the yield on US 10 Year Treasuries to 2.72 per cent, and the yield on US 2 Year Treasuries to 2.52 per cent. The US Dollar is looking exhausted as-a-result, falling to 96.40, supporting a push higher in gold, which rallied to $US1283 over the weekend. The anti-risk, ant-growth mentality of traders has also pushed the Yen deep into the 110-handle and held the AUD/USD to support at 0.7040.
    Trade war: It’s very unlikely to change the trend or status quo, however today’s focus, at the outset, should be directed towards riskier, growth exposed assets. A mere Tweet of course, though confidence again has been piqued by assurances from US President Donald Trump over his Twitter account that there is being made “Big progress being made (on a trade deal)”. Markets are used to this commentary, so the chances of a complete overturn of the prevailing view on the trade war is next-to-zero. Even still, it adds to what appears to be positive momentum in working towards a trade-resolution, at a time where Chinese equity equities keep plumbing to new lows, and fears mount for the health of the Chinese economy and financial markets.
    ASX200: As this all relates to the ASX200 today: the latest traded price in SPI Futures is implying a 22-point jump for the index today. The trend for the ASX200 is still lower, meaning market bulls should remain cautious. With its break through ~5630 on Friday though, the index apparently possesses some upside, even if for no longer than the short-term. The market is currently wrestling with the index’s 50-day EMA at 5669 – eyeing the psychological-barrier of 5700 presents as the next key level. Beyond that, a line-in-the-sand is draw at 5760: the level represents boundary line resistance, traced back to the index’s last high. Given that the fundamentals are yet to greatly shift, a break through this level seems unlikely. However, it might well indicate that at least for the ASX, the bears are losing control of the market.

     

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