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MaxIG

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  1. MaxIG
    Fed minutes: The week’s blockbuster event dropped over night: the release of the FOMC’s Monetary Policy Minutes. Equity markets have staged a tentative turnaround globally this week, but it has all been occurring in the shadows of what could be gleaned from last night’s Fed minutes release. When all is weighed up, the document reaffirmed the Fed’s hawkishness, revealing in-depth discussions ranging from cutting the word “accommodative” from the central bank’s language, to debating the possible need to hike rates above the “neutral rate”. A spike in volatility in financial markets wasn’t forthcoming on the back of the release, most likely because traders have been analysing it in a far different context to the one in which it was written: the meeting precipitated the recent equity market rout, and therefore appreciate circumstances have duly changed.
    US markets: However, the detail in last night’s minutes establishes the new environment within which future Fed policy discussion will take place – both for the Fed itself and amongst market participants. Reaction’s to the Fed minutes were relatively dull overnight, seemingly due to a reluctance from traders to jump-the-gun. Benchmark US 10 Year Treasury yields climbed modestly to 3.17 per cent and the US Dollar has taken advantage of a weaker bid on the Pound and Euro to climb slightly. Wall Street has suffered somewhat, erasing earlier gains on earning’s optimism to trade more-or-less flat-to-down for the day. The trade dynamic gives a curious impression for equity indices, a struggle between an apparent binary: a battle of forces, if you will, between optimism regarding solid earnings growth and pessimism regarding the impact of higher global rates.
    ASX yesterday: SPI futures have absorbed the lead on Wall Street and translated it (currently) to a 13-point drop at the open for the ASX200. No cause for alarm naturally, following a day where the Australian share market put-in a broad-based rally, to bust back within the upward trend channel it abandoned during last week’s equity sell-off. The ASX200 was registering an oversold reading on the RSI leading into yesterday, and a basic breadth reading of 74 per cent yesterday across the index recognized the sell-off was a tad overdone. The growth stock heavy health care sector ran with the lead of US big tech, to top the markets winners; while the only sectoral laggard for the day was the materials space – though that can somewhat be discounted by the unlucky timing of news from BHP regarding that company’s production downgrades.

    ASX day ahead: The day ahead will probably be a grind for the ASX200 given a weak Wall Street lead, but a hold within its trend channel, the bottom of which is around 5890, should be considered a win for the bulls. As always, the core strength in the market was underpinned by a bounce in the banks yesterday, a theme that may well continue today given the boost in global bond yields, but will likely fizzle in the weeks and months ahead. Activity around the Asian region was also settled, with Chinese equities for one catching a small bid on rumours that a further cut to China’s banks reserve-ratio-requirement may be imminent. The general relief-rally provided the fuel for a pop in the MSCI All-Asia Index, pulling that index away from its near-18-month lows.
    Aussie employment: The major event risk for Aussie markets today will be domestic employment data, out of which the ABS is forecast to print a steady unemployment rate of 5.3 per cent and an employment change figure of 15.2k. Only the most extreme outcome to this release will shift the dial in financial markets, especially that of interest rate markets, which continue to price in no-move from the RBA until early-2020. A sprinkle of volatility could be seen in the AUD/USD, as that pair hugs support just above 0.7100, but as always, will probably take a stronger lead from activity in the greenback. The spread between US 2 Year Treasuries and 2 Year Australian Government Bonds has narrowed of late, supporting the AUD/USD – however a repricing of interest rate expectations for the US Fed could widen this spread once again, potentially pushing Aussie Dollar back towards previous lows at 0.7040.

     
    Europe: Taking a glance at other risks entering the end of the week, European markets continue to remain a source of uncertainty. European bureaucrats have gathered for a multi-day summit in Brussels, to discuss the many seemingly intractable issues facing the continent. A Brexit deal this week is becoming a diminishing prospect and is showing up in pricing across the region’s financial markets. Adding to the tension is a slight spike in anxiety relating to the Italian fiscal situation, stoking fears of greater animosity between Europe’s leaders and a general instability the European Union’s political structure. Credit spreads have widened in sovereign bond markets as a result, weighing on the Euro and Pound (which also receded on the back of weaker CPI figures overnight), sapping strength from the major European equity indices consequently.
    Oil: Oil markets deserve a mention, given the human-tragedy that is defining much of the volatility found in the price of the black-stuff now. Fundamentals first: US Crude Oil Inventories surprised to the upside overnight, sending the price of Brent Crude to the $US80.00 per barrel mark. The real developments in all markets this week centre, however, on the alleged murder of journalist Jamal Khashoggi by the Saudi Arabian regime. Putting aside (the far more important) humanitarian implications of this situation, speculation has increased that the Saudi’s will exploit the leverage they possess in the form of their massive oil reserves to suffocate scrutiny on the subject by members of the global community. The details of the matter are far too nuanced to do justice to here, but the approach taken by global leaders to the Saudis and the subsequent Saudi response could prove one of the major determinants of oil price volatility moving forward.
  2. MaxIG
    Around the globe, geopolitics dominates: Political spot fires have captured the attention of market participants. From Washington, to Hanoi, to Kashmir, to Caracas, to London: the ugly machinations of power have dominated the headlines. Only, despite fleeting action, the impact to market activity has seemingly been muted. A facile logic might suggest that it is because of the geopolitical uncertainty in the world that markets have traded so dull overnight. It would be too long a bow to draw, though: tremors can be seen in prices, but a global earthquake can’t be found. Not to diminish the events turning the world in the last 24-hours: they go well beyond the importance of markets. It’s simply just developed markets haven’t responded terribly much to them.

    In Washington: The most salacious news that had traders’ interest excited last night took place in the halls of US Congress. No, not the testimony of US Fed Chair Jerome Powell – though his words are of far greater import to markets. It was instead the unfolding Michael Cohen testimony, at which the disgraced lawyer has cast a series of accusations and aspersions toward US President Donald Trump, on issues ranging from Russian ties, electoral fraud and hush payments. On the face of what’s been said, the revelations are potentially monumental. However, although demonstrating signs of nervousness in the lead up to the testimony, as it unfolded, financial markets have seemingly shrugged off the possible implications of that event.
    In Hanoi: Is it a collective dismissal of Cohen’s testimony? It’s too hard call. One assumes that if there was a material chance that US President Trump could fact impeachment, traders would stand to attention. So far: they haven’t, so the roughest conclusion is that such an outcome is still considered unlikely. As the never-ending circus plays-out in Washington, US President Trump is of course half-the-world away in Vietnam, trying to employ his self-styled statesmanship to charm North Korean leader Kim Jong-Un. The end game is denuclearisation in the Korean Peninsula and the end of what is technically a multi-decade war. Again, despite all the pomp and ceremony, markets are behaving as though no breakthrough will happen in that matter this week, either.
    In Kashmir and in Caracas: Political posturing, and financial markets’ eye rolling, aside, there is a firm gaze on what is happening in both Venezuela, and the Indian-Pakistan border. At risk of conflating two all too complex geopolitical issues, markets are apparently taking note of the escalating tensions in those geographies. The necessary moral caveat:  the potential for human suffering in each conflict is the biggest issue by any measure. But for traders, the power-struggle in Caracas is being judged on its impact on oil markets, and the potential it could inflame tensions between the US, Russia and China; while the conflict in Kashmir is being monitored for the potential for an all-out war between two nuclear-armed nations.
    Back in Washington; and in London: It’s a tinderbox out there, but until it catches alight, markets en masse don’t appear too fussed. The geopolitical concerns pertain primarily to the trade-war and Brexit – the perpetual bugbears. The trade-war narrative overnight centred on a statement by Robert Lighthizer that America is pursuing “significant structural changes” to China’s economy. It’s contestable what impact that statement had on markets. The Brexit narrative did manifest in markets, however: falling into lock step with the UK on the issue, the European Union stated its amenable to extending Brexit if necessary. The Cable leapt to 8-month highs, Gilt Yields rallied across the curve, and a much better than 50/50 chance is being priced in the BOE will hike rates this year.
    Bonds fall; oil rallies: The market-friendly Brexit news looks as though it shared its benefits across national economies. German Bund yields climbed considerably, as did US Treasury yields. The yield on the US 10 Year note touched 2.70 per cent – something of a relief rally. Global equities were more reticent, with the major European and North American indices trading generally in the red. Important to note: the selling in bond markets could perhaps also reflect fundamentally altered inflation expectations, over and above growth optimism. Oil prices leapt overnight after US inventory data showed a much larger than expected drawdown in reserves, leading to US 5 Year Breakevens hitting 1.87 per cent – a level not registered since the middle of November last year.

    Australia: While inevitably influenced by Wall Street’s limp-lead, and the political ructions evolving across the planet, SPI Futures are indicating an Australian share market that is marching to its own beat once more. On that contract: the ASX200 ought to open roughly 9 points higher this morning, perhaps due to the jump in oil and a leg-up in iron ore prices. The day’s trade might find itself focused on the macro-outlook for the Australian economy, and the reactions in ACGBs, the AUD and pricing for RBA rate cuts: local Capex figures will be delivered at 11:30AM this morning – and are taking on greater significance after yesterday’s Construction numbers greatly missed economist consensus forecasts.
    Written by Kyle Rodda - IG Australia
  3. MaxIG
    Fed on tap: It’s a commentary written on the fly this morning, as developments out of this morning’s US Federal Reserve meeting are being digested by markets. The Fed has hiked rates just as they were expected to do, with market participants now trawling through the fine print in the Fed’s commentary. We were expecting a “dovish hike”; what we got looks like a “less-dovish than-expected-hike”. The dot plots were revised as presumed: the Fed has told the markets that it expects interest rates to be lifted twice in 2019, rather than the three-times implied in the September dot-plots. It also downgraded its growth expectations and hinted unemployment is likely to pick up in the medium term. Overall, though, at first glance this looks like a Fed reasonably content with their policy position, as well as the position of the US economy.

    First responders: Price action in markets have been interesting. The message being delivered by the Fed is somewhat curious. Initial judgements are that they’ve struck quite an effective tone, albeit one that was probably different to that which was implied in market pricing prior to the event. US stocks are paring their gains for the day; volume has returned to Wall Street, after being below its average for most of the session last night. The NASDAQ is in the red presently: momentum stocks (read: information technology firms) are being hurt by the “less-dovish” Fed. Investors don’t want to buy into growth, it would seem. The intraday trend is pointing to a down day for Wall Street, though naturally that could turn in the next hour-and-a-half.
    Rates markets: The VIX is down currently, which is a good early indicator that markets are less-uncertain after the Fed’s announcement. That’s not always guaranteed and is liable to change today; one assumes policy makers would be pleased with that outcome. Interest rate markets, as the data presents itself in the Bloomberg World Interest Rate Probability data, aren’t presenting signs of adjustment yet. That indicator still implies only a modest 14 basis points of hikes into 2019 from the Fed – though it is showing a greater chance that the central bank will stop or even reverse course in 2020. Arguably, the most interesting price action has transpired in US breakeven inflation rates: the 5 Year indicator has dropped to imply future inflation of just below 1.6 per cent – well below the Fed’s target level of 2.00 per cent.

    Powell Press Conference: Fed Chairperson has delivered his commentary and is taking questions from the press. Markets are reacting quite well to what he is saying but most asset classes are still swinging around a lot. The “data-dependant” line is being touted once again, suggesting a flexibility to future policy decision. The dot-plots too, it has been stated several times, is not a consensus estimate or guideline and is subject to revision. Traders ought to take comfort from that notion: if things get uglier, for whatever reason, the Fed will provide some sort of a back stop – a low-premium Powell-put, perhaps. However, a positive – a less dovish, more hawkish – tone has been delivered. Powell is waving away some of the recent financial market volatility, despite acknowledging that financial conditions are less accommodative for economic growth.
    Bonds and currencies: Bond and currency markets have been the locus of activity, as one would assume. Sentiment is still shifting in response to new information, though some insights into the collective consciousness of traders can be inferred. The US Dollar is turning higher for the day, climbing toward 97 according to the US Dollar index. The greenback is performing best against risk and growth sensitive currencies like the Australian Dollar: our currency has been dumped, tumbling over 1 per cent to sit just above 0.7100, at present. Bonds are rallying across the board and all the way across the curve. US Treasuries are of course leading the drive: there is the feeling that risk aversion is taking hold now. Equities are selling-off: one criticism popping up now is the Fed is not taking financial market volatility seriously-enough.
    US Treasury yields: A cursory analysis of the yield curve is presenting some interesting information, too: the yield on rate sensitive US 2 Year note has fallen by 2 points at time of writing, but the US 10 Year note has fallen by an even greater 5. The spread between those two assets has narrowed to 13 points. Traders are suggesting, as they had been at stages in the lead up to this Fed meeting, it expects the Fed to keep tightening rates, even in the face of lower inflation and growth prospects. If anything is going to spark fear and further volatility today, it’s probably going to be based on that point. An imminent-enough economic slow-down is upon us, it is being implied, however the Fed will likely stick to its strategy of restricting financial conditions by lifting interest rates.

    The aftermath: The event is more-or-less over now: all the official information is out-there, and Powell has delivered his press conference. Now traders trade and speculate on what has been communicated to the market. After holding up well enough initially, US equities are being smashed and futures markets are pricing in a sell-off across both European and Asia markets. Looking at the market-map of the S&P500, it’s all a sea of red now, with just over half an hour left in trade. That index is clambering to hold onto the 2500 handle, while the Dow Jones has just registered a new year-to-date, intra-day-low. After all the formalities, market participants are behaving none-too-happy with what they have received this morning: stocks are off on volumes that have gone through the roof, credit spreads have widened, and safe-havens are being sought out.

    ASX today: Though it has suffered in the global equity sell-off, the ASX200 has held-up rather well of last, at least when compared to its global peers. SPI Futures have swung heavily this morning, vacillating all in the time it takes to type a sentence in a range between 7-to-25-points. Yesterday was a soft day for Australian shares as traders positioned for this morning’s Fed; the only bright spot for the session was the announcement from APRA it was going to lift lending restrictions on investor only loans. That fact gave the real estate sector, the banks and the consumer staples space a boost. What’s in store for the day ahead is hard to pick for a trader right now: the markets are shifting so rapidly. Anything more than a flat day for Aussie shares would be surprising. IG is pricing the ASX at 5560 as of 7.45AM, with the recent intra-day low of 5551 the level to watch today.
  4. MaxIG

    APAC brief - 21 Mar

    By MaxIG,

    Market action proves it again: this market hinges on the Fed: The US Fed has proven itself as the most important game in town for traders. The FOMC met this morning, and lo-and-behold: the dovish Fed has proven more dovish than previously thought; the patient Fed has proven more patient that previously thought. Interest rates have remained on hold, but everyone knew that was to be the case today. It was about the dot-plots, the neutral-rate, the economic projections, and the balance sheet run-off. On all accounts, the Fed has downgraded their views on the outlook. And boy, have markets responded. The S&P500 has proven its major-sensitivity to FOMC policy and whipsawed alongside a fall in US Treasury yields, as traders price-in rate cuts from the Fed in the future.

    The US Dollar sends some asset classes into a tizz: The US Dollar has tumbled across the board consequently, pushing gold prices higher. The Australian Dollar, even for all its current unattractiveness, has burst higher, to be trading back toward the 0.7150 mark. Commodity prices, especially those of thriving industrial metals, have also rallied courtesy of the weaker greenback. Emerging market currencies are collectively stronger, too. This is all coming because traders are more-or-less betting that the Fed is at the end of its hiking cycle, and financial conditions will not be constricted by policy-maker intervention. Relatively cheap money will continue to flow, as yields remain depressed, and allow for the (sometimes wonton) risk-taking conditions that markets have grown used to in the past decade.
    Some risk being taken again, though somewhat nervously: The play into risk-assets makes everything sound quite rosy. There are caveats to this, however. And that relates to what’s been inferred about global growth from the Fed’s meeting this morning. Implicitly, at the very least, the Fed has acknowledged that growth in the US and world economy is all but certain to slow-down. It wasn’t said outright – a central banker would never want to be anything less than cautiously optimistic – but the tone of Fed Chair Powell at his presser suggests a Fed that is sufficiently concerned about the global economy that they will definitively reverse its policy “normalization” course. Positivity was maintained by the Fed about US economic conditions, outrightly. However, the market has read between the lines, and it doesn’t like what it sees.
    Interest rates are now expected to be on hold for this cycle: So: although swung around post release, the more important bond market is telling a clearer story. The yield on the US 10 Year Treasuries have tumbled nearly 8 points to 2.53 percent, and the yield on US 2 Year Treasuries has fallen 7 points to 2.39 per cent. More remarkably, the yield on Treasuries with 3, 5- and 7-year maturities have dropped over nine points, creating a yield curve with a very flat belly. Of most concern here is that all of these securities are trading just at, or well below, the Fed’s current effective overnight-cash-rate of 2.40 per cent. Traders are now pricing in a greater than 50 per cent chance the Fed will cut rates by early next year, on the basis of deteriorating economic conditions.

    It’s getting harder for the Fed to get the right balance: The tight rope is getting narrower. For market participants, as always: on one side of it sits the need for accommodative financial conditions, on the other the need for robust growth conditions. It’s the rudimentary in principle, though complicated in practice, interplay between the credit cycle and the business cycle. Out of this Fed meeting, the proverbial tight rope walker is nervously shifting her gaze down towards the economic growth outlook. Powell and his team have apparently not struck the necessary equilibrium in its approach to its policy and communications to the market. Yes (again), risk assets have rallied, but right now, not in such a way that suggests the bulls are significantly more confident in the investment environment being planted before them.
    Other stories also important, though not as much as the Fed: Some of this could be attributed to the overhang coming from some of the other significant economic stories yesterday. Sentiment has been dented by news that key EU figure Donald Tusk may demand that no Brexit extension is granted for the UK; it has also been liver-punched by a story suggesting US President Trump does not necessarily see a lifting of tariffs on China occurring in any US-Sino trade deal. Once more: it does appear that markets have seen the greatest gravitas in the Fed meeting, though. And traders’ nervousness is being betrayed by this: despite a dovish tact, corporate credit spreads have rallied, the VIX is off its multi-year lows, and US Break-evens are revealing greater inflation risk in the US economy.
    Australian markets to be defined by Fed and employment numbers: Fittingly, SPI Futures are suggesting the ASX200 will open somewhere between 5-and-10 points lower this morning. Speaking of markets and the growth outlook, not only will Australian trade be impacted by the fall-out from the Fed’s nervously dovish tilt, we also get some highly anticipated employment figures out this morning. The currency and rates markets will be what to watch for: the themes driving the ASX200 this week is the renewed push in iron ore prices, along with the rotation into yield-driven defensive sectors as Australian ACGB yields tumble. The RBA have hitched their hopes for the Australian economy on a tightening labour market and subsequent lift in wages growth and inflation. Watch therefore today for any major downside miss in employment numbers.
    Written by Kyle Rodda - IG Australia
  5. MaxIG
    Written by Kyle Rodda - IG Australia
    The fallout: The US mid-terms have passed, and while there were signs throughout yesterday's trade that the vote would throw up a few curly situations, the outcome fell broadly in line with market expectations. The VIX has dropped and US equities, paced by the NASDAQ, have subsequently rallied, primarily on the knowledge that everything went according to plan -- proving the notion that the biggest drag in markets all-in-all is uncertainty. There are enumerable possibilities, all with various implications for traders, opened-up by yesterday's result, and one assumes that they'll be digested calmly by market participants in the times ahead. Ultimately, however, one major risk has been navigated through without much bloodshed, allowing traders to return their attention to arguably the more significant, fundamental issues at hand.
    Gridlock: The term that perhaps has been hurled around most since it was confirmed that the Republicans would hold the US Senate and the Democrats would nick the House of Representatives is "gridlock". In the so-called "age of bipartisanship", a split in power within congress all but assures the adversarial tone of the late-Obama era returns. In a representative democracy, in principle, that need not be cause for concern, but it does imply greater inertia in legislative action. That means Tax Cuts 2.0 (as they've been dubbed) are all but dead, buried and cremated, and that a push for fiscal restraint by the Democrats could complicate issues around budget policy and the national debt ceiling in the future.
    US bond markets: The possible dynamic has shown up in prices already. An analysis of the US Treasury yield curve reveals this. The fact yesterday's results ensure a possibly stagnant congress has been interpreted as a continuation of the status quo in the short term. The yield on interest rate sensitive US 2 Year Treasuries has ticked higher to 2.94 per cent over night on expectations that the current growth formula will go unchanged – and lead to a continuation of the US Federal Reserve's rate-tightening regime. Conversely, the yield on fiscal policy (read: debt and deficit) sensitive US 10 Treasuries has dipped slightly to 3.19 per cent, on the belief that a debt blow-out from Trump's planned tax cuts and infrastructure spending program will not go ahead.
    Currency markets: The consequence of this shift in expectations regarding US fiscal policy is the US Dollar has sold-off overnight. It appears the interplay of forces is the ideal recipe for a slower rise in the greenback: global growth remains supported in the short-term, benefitting riskier currencies, but lower long-term yields are making the USD relatively less attractive. The knock-on effect has seen the EUR and Pound rally above 1.1450 and 1.3140, supported by strong German industrial output figures last night; and commodity-bloc currencies such as our own Australian Dollar has definitively broken its downward trend to trade at 0.7280. The balance between a weaker greenback but greater risk appetite has kept the USD/JPY flat at 1.1340, while gold has also remained steady at $US1226 per ounce.

    What for the trade-war? The implications for the other major global macro-risk from yesterday's vote, the US-China trade war, has thus proven a touch unclear. China's equity markets closed lower for the day, the Yuan whipsawed, and prices in growth proxy commodities -- such as copper --fell, seemingly on the uncertainty of what a greater representation of Democrats in Congress means for US foreign policy. In principle, the philosophically liberal-internationalist Democrat party could lobby for greater multilateral engagement with China and other world powers, but in this new age of populism, old assumptions may no longer prove reliable. Futures markets are projecting a better day for the Asian region, however a flicker of greater volatility in Asian markets should be expected leading into the highly anticipated G20 summit at the end of the month.
    ASX200: SPI futures are indicating a 28-point jump at the open for the ASX200 this morning, as the local market looks to extend its solid gains this week. The day yesterday ended in a 0.4 per cent gain for Australian shares, on reasonably solid breadth of 64 per cent. Volume was below average owing to the major event risk of US mid-term elections once again, however a rotation away from defensive sectors and into growth stocks and cyclicals supported the narrative that the outcome of yesterday’s vote is positive for the equity bull market. The ASX200 now sits on the cusp of technically reversing the short-term trend brought about by October’s massive stock market correction, with a meaningful hold of around 5930 today the level to watch.

    Today’s major events: Amid all the news and analysis around US mid-terms, a quick refocusing on the week’s other risk-events will emerge in markets today. Of significance today: the RBNZ met this morning – in what is probably the key event for the Asian region – and kept interest rates on hold as expected. The tone struck by the RBNZ has thus far been judged as rather dovish, legging the Kiwi Dollar’s run higher above the 0.6800 handle. Turning attention to more pressing global event-risk, it comes no bigger than tonight’s meeting of the US Federal Reserve. The Fed won’t move rates, that much is known. The attention will be directed instead towards the Fed’s commentary about its flagged December interest rate hike, plus its views on further rate hikes into 2019.
  6. MaxIG
    Global political economy in focus: International diplomacy, politics and global trade are at centre of attention to begin the new week. Indeed, that’s in part due to the corporate and economic calendar appearing relatively lighter, being the final week of the month; as well as the fact the UK and US are off on public holidays on Monday. But even in the absence of other hard-hitting, high impact news, the confluence of politics-related headlines merits attention in their own right. And it spans the globe: Trump is talking trade in Japan, the Europeans are voting in their Parliamentary elections, and the UK is now searching for a new Prime Minister.
    Markets watching for surprises: The overarching narrative hasn’t fundamentally changed. Generally speaking, a level of bearishness characterizes market activity, as the US-China trade war continues to rattle nerves. Nevertheless, global politics and international relations is bringing-about some shifting gears within the broader economic machine. On balance, there’s been little fall-out from the handful of political events unfolding across the globe. If anything, though not game-changing, they’ve collectively proven to be a net-positive for market sentiment. Of course, this could turn-around rapidly: traders ought to be used to expecting the unexpected by now. Hence, the least that can be said is “so-far”, so good.
    The future of Europe in question: European Parliamentary elections was where most interest lay over the week. For market participants, the vote is being viewed, and has been positioned for, through the lens that this election is a measure of public-sentiment towards the European Union as a political structure. Voting is in the process of wrapping-up currently, but from the available early indicators, the outcome of the poll looks to be in favour of pro-European parties. It must be said, there seems to be a sustained growth in Euro-sceptic parties. However, for the time being, such anti-establishment forces remain in the minority, and look broadly contained.
    Euro-sceptic parties grow, but stay in minority: Whether that proves to be a good thing or not is a value judgement. Of even greater import: whether, in the long-term, the continuation of the status quo is desirable is a more profound issue. In the here and now though, fewer uncertainties within the European political system will inevitably be welcomed by investment markets. This is especially so given Europe’s precarious economic position. European growth is anaemic, in the truest possible way, with policymakers possessing very few options in terms of monetary and fiscal policy. Europe’s problems won’t disappear with this election result, but at least it keeps one risk at bay for now.

    Leadership tussle begins in the UK: Across the English Channel, and the UK is facing its own political challenges. UK Prime Minister Theresa May has tended her resignation, and the jostling now begins for the Conservative Party leadership. In what will probably be another little test of liberal internationalism, market participants are watching the Tory leadership contest closely, in order to judge every candidates credentials and positions on Brexit. It’s very early days, however Boris Johnson is emerging as the favourite to achieve his long-held ambition to wrest the party’s leadership. And markets aren’t taking kindly too that, given the man’s “hard-Brexit” sympathies, and general populist-streak.
    Trump in Japan: For the next 24 hours, the interest of market participants will turn to US President Trump’s visit to Japan, as he chats trade and regional security. Japanese Prime Minister Abe and his team are apparently on the charm-offensive with Trump – treating him to games of golf, and all the other spoils of high-diplomacy. At-the-moment, risk-appetite is dwindling in financial markets, as the trade-war escalates and the White House hurls threats to its trading partners about imposing higher trade barriers. Market action will be in some-way determined by what commentary comes from Trump after this little summit, and whether he cools his anti-trade rhetoric.
    The lead-in for Australian markets: Despite the heightened nervousness brought about geopolitics, price action was relatively limited, and market activity was quite low, on Friday. The S&P500 edged modestly higher, while US bond yields lifted slightly. SPI Futures are indicating a follow through of this sentiment, pointing to a narrow, two-point drop in the ASX200 this morning. The AUD is back into the 0.6900 handle too, courtesy of a weaker greenback, after US Cored Durable Goods orders data disappointed on Friday – and comes despite a major drop in Australian bond yields, which saw the 10 Year note’s yield fall to par with the current cash rate of 1.50 per cent.

    Written by Kyle Rodda - IG Australia
  7. MaxIG
    ASX missed the party yesterday: The ASX bucked the trend yesterday, at least across the Asian region, closing 0.26 per cent lower at 6063. Ostensibly, Australian shares missed-out on the party: global equities were noticeably higher across the board, with the other major regional indices in China, Japan and Hong Kong adding well in excess of 1 per cent for the day. Though a step-back for the Bulls, it's no cause for alarm: the price action speaks of a few idiosyncratic quirks on the ASX200 yesterday. The index was weighed down by a few heavy-hitters: CBA went ex-dividend and its share price fell 2.89 per cent; and despite reporting some solid results, over-zealous investors dumped CSL following the release of that company's earnings, to push its share price down 3.92 per cent.

    CBA and CSL weighed on the ASX200: In an index like the ASX200, which is quite top heavy, when 2 of your top 5 weightiest stocks underperform markedly, registering a day in the green is always going to be a challenge. Other measures of how the market performed for the day present more favourably for the Australian share market. Breadth was respectable at about 60 per cent, for one. There was another failure by the ASX200 to break resistance at 6100, which might add to the view the market has gassed-out in the short term and is due for a pullback. Conditions for medium term upside remain in place nevertheless, especially if the prevailing macro-themes in the market, ranging from central bank policy to the trade-war, continue to fall the way of the Bulls.
    Risk appetite elevated on positive news: SPI futures are indicating a modest lift in the ASX200 this morning, of around about 6 points. Wall Street, at least as this is being written, is registering another day of gains, albeit on some pretty low octane trade. The week in global equities has been defined by more positive trade-war headlines, which has raised the prospect of a continued freeze in trade tensions. It's difficult to imagine that the trade-war will go away any time soon, but markets probably have accounted for that in prices. Global growth will stay the underlying bugbear, so long as central bankers don't rattle the cage with rate-hike talk again. However, a weaker global economy is something traders seem willing to stomach for as long as recession risk remains low in the short term.
    Upside exists as long as recession risk is low: That's likely where the current equity market-run would stop in its tracks: if a recession finally hits one of the major economic regions. In the absence of this though, history suggests that, although the returns would be meagre compared to what was experienced during the "synchronised global growth" upswing in 2017/18, gains in stocks in an environment of slackened global growth are still possible (if not the recent norm) if loose monetary policy is maintained. It’s looking as though a familiar dynamic is taking hold: a fundamental search for yield, in an environment that supports risk taking, is seeing capital move out of safer assets in fixed income and cash markets, and into higher yield equity markets – boding well for global equity indices in the short-to-medium term.
    Its Fed before fundamentals but that could change: Market participants have proven their concern is first with the Fed and financial conditions, followed by fundamental concerns like earnings, global growth and concomitant factors like the trade-war and geopolitical ructions. Again, that balance would shift in the event recession risk becomes too heightened. While not an immediate problem now, such a risk ought not to be waived away. Economic data is treading a fine line, especially in Europe, and would indicate the world economy is on some sort of slippery slope. China is in the same boat, but unfortunately the opacity of their financial system and economy make it difficult to garner a credible view on the Middle Kingdom. The US stands out as a beacon in the global economy presently and is willed by the Bulls to maintain its currently solid growth outlook.

    Inflation risk looking low: One risk that doesn't appear too bothersome for traders -- in fact, it may be a welcomed dynamic -- is that inflation in developed markets is apparently flatlining once again. It was a theme of last night's trade: market’s received inflation data out of the U.K. and US economies, prefacing the release of Chinese CPI data today. On balance, CPI missed expectations in both the US and UK overnight, presumably to the relief of central bankers, who in the face of market volatility and growth concerns, would loathe being pushed into hiking rates because of an inflation-outbreak. In response to the news, traders maintained their position that global rates will stay low this year, as the global economy wrangles with its current funk.
    European bond curves flattening; greenback stands to benefit: Bond curves have flattened in the European region, consequently. Bizarrely, and this does not bode well for the Euro and Pound potentially, markets are still pricing in some-chance of a rate hike still from the Bank of England or European Central Bank this year. Far be it to argue with the will and wisdom of the market but given Brexit tensions and clear signs of cracks in the continent’s economy, the notion rates can move higher in this dynamic is fanciful. The US Dollar will be a barometer for European (and probably global) growth risks, as well as the rate outlook for the BOE and ECB. Although the greenback is still range-bound here-and-now, a desire for safety and higher yield should attract investors to Treasuries, and subsequently bolster the USD going forward.

    Written by Kyle Rodda - IG Australia
  8. MaxIG
    Stocks fall as markets adjust US rate expectations: Traders have gone about repricing a world without the same imminence of rate cuts from the US Federal Reserve overnight. US Treasury yields have climbed markedly, during the North American session in particular, dragging with it stock indices. The S&P500 has traded 0.21 per cent lower, as traders apparently take their profits and adjusted their forecasts in line with the new dynamic. The action seen in the last 48 hours has given undue merit to the “sell-in-May-and-go-away” maxim; but however shallow the saying, profit-taking from all-time highs, and at that, overbought levels, has (ostensibly) proven the rational course of action for market participants right now.
    The necessity of a pullback in US stocks: It’d be of little surprise to any clued-up investor or trader as to why the markets’ pull back has transpired. Leading into yesterday’s US Fed meeting, the risk was widely called, and very well telegraphed by pundits. There was a sense US interest rate expectations weren’t on par with reality. But the short-term vagaries of market psychology drove rational folk to buy into the market, chasing momentum, after the S&P500 hit its all-time highs. The giddiness is over now, and what is being witnessed is a sensible recalibrating of market participants’ positions, more aligned with current market fundamentals.

    US inflation the key risk, ahead of NFPs: The pull-back in US stocks ought to be transient, provided inflation and inflation expectations don’t blow-out. The risk of this happening is quite low, although market measures of implied inflation have shifted higher in the past 24 hours. In light of this risk, the major event in the next 24 hours will be US Non-Farm Payrolls data, with key wages growth component of the data to be of most interest. A big beat on this number could add further to bets of higher inflation, and less accommodative monetary policy from the Fed — and therefore threaten to exacerbate the current market sell-off.
    US Dollar showing few signs of weakness: If we were to see an upside surprise in wages growth out of the NFP data, then it would likely only add to the might of King Dollar. The Greenback lifted across the board last night, courtesy of the rise in US Treasury yields. With the US economy the only major, developed economy looking in anything resembling a healthy state just at present, it’s difficult to imagine anything but a continuation of the Dollar’s upward trend. By extension, of course, this does not bode well for the Aussie Dollar: once again the local unit flirted with life in the 0.6900 handle overnight.

    The other macro-stories, ex-US: In the interest of balance, the US macro-story, while clearly the most significant, wasn’t the only thing driving market activity overnight. Numerous other (albeit lower impact) events transpired, and shifted market pricing around modestly. European PMI figures were dropped, and they were generally better than expectations, leading to a relatively (and only relatively) good day for the DAX. While the Bank of England met, and kept interest rates on hold at 0.75 per cent as broadly expected, but cut its inflation expectations in the process for the UK economy.
    The ASX to recover some of its losses: This morning, SPI Futures are suggesting a 7-point lift to the ASX200 at the open, belying the down-day across global equity markets. The weaker Australian Dollar might have something to with this, with few other clear, positive leads apparent for the market. The jump at the open will do relatively little to erase yesterday’s tumble, which saw the ASX200 drop 0.59 per cent. It was a sell-off with quite a level of breadth and activity behind it, too: volumes were above average for the day, and market breadth was a meagre 33 per cent.
    Bank shares giveth, and bank shares taketh: In a reversal of fortunes from the prior day’s trading, it was the financial stocks that drove the losses in the ASX200 yesterday. Stripping 22 points from the index, bank stocks took a spill after NAB missed profit expectations, reported a bigger than expected narrowing of its net interest margin, and slashes its dividend from $0.99 to $0.83 per share. Backing on from ANZ’s results the day prior, NAB’s earnings cast doubt on the hope of a trend-reversal in Aussie bank shares, with Westpac’s results on Monday now the next major for bank-share, and ASX200 traders.

    Written by Kyle Rodda - IG Australia
  9. MaxIG

    APAC brief - 10 April

    By MaxIG,

    Waiting, waiting, waiting: Another uneventful night in global markets, traders have apparently occupied themselves positioning for the ramp-up in economic data in the next 24 hours. Equity indices pulled back in North America and Europe, as global safe-have bonds caught a bid. Commodities fell across the board, naturally with the exception of gold, which ticked higher on haven-demand. The G10 currency complex was lifeless, with the Japanese Yen edging higher as the carry trade was unwound on anti-risk sentiment. And in line with overnight trade, after a flat day yesterday, SPI Futures are indicating the ASX200 will drop 15 points come the open this morning.
    IMF rubber-stamps growth outlook: The macro-event that caught most attention last night was the IMF’s anticipated downgrade to global growth. Given the loaded calendar from now until Friday, perhaps that update was an appropriate precursor to the litany of risk-events. As can be inferred from the description of overnight price action, the release wasn’t met with a great deal of surprise, reaction or volatility. However, the message was stark, and worth noting. In the wise-old-eyes of the IMF, global economic growth ought to slow down to 3.3 per cent in the year ahead – a revision lower of its previous estimate in January of 3.5 per cent.
    Slow-down to be fleeting? Despite all their resources and soft power, the IMF told market participants something that they sort of already knew – and more importantly, had already priced-in. Higher trade barriers have sapped trade-flows and growth in emerging-markets. The consequences have flowed to developed economies – especially those of the European Union, which collectively will slow down to 1.3 per cent this year. For all this knowledge, risk assets remain supported. Maybe it’s this silver lining that’s keeping hope alive: although certainly below what its been in the past, forecasts suggest that the global economy will recover into the back end of 2019.
    Bonds flashing amber signals: The growth picture beyond that is a little sketchy, though on-balance its probably not a positive one. It is a matter of debate as to what this all may mean in a contemporary context, but at least a recognition of what rates-markets may be suggesting about the longer-term growth outlook should be discounted. Yield curves across developed economies still portray an ugly kink in the 3-to-7-year sections, implying a marked economic slowdown, along with subsequent central bank policy intervention, the world over at around that time-period. Generally, market participants do seem cognizant of the fact, and are treating it with merit.

    Make hay while the sun shines? But its material consequences aren’t yet being felt: it’s a case of make-hay-while the sun shines. And as far as risk assets go, the momentum on Wall Street Indices, and to a lesser extent the ASX200, can be somewhat attributed to this short-termism. Earnings growth prospects for the next quarter and next half are dim. Wall Street earnings season is practically upon us, and the series of revisions that have taken place since the start of 2019 has led to the consensus view earnings growth will have contracted by over 4 per cent; in Australia, earnings growth is expected to stagnate.
    Earnings forecast to improve, eventually: However, the bigger picture view is that earnings growth will turnaround. And in no small part it seems, markets are banking on a central-bank engineered turnaround in the global economy before year end. More than just a fall in discount rates, the projected recovery in sales growth across the S&P500 speaks of a belief that demand can be sustained enough to keep delivering growth to US corporate’s top line. It’s here where the bulls and bears become divided: sure, a chase for yield and capital growth will support flows into equities, but is a lift an improvement in fundamentals really that likely?

    The week to finally pick-up: It all rests on the fortunes and policymaking of the global economy’s triumvirate, of course: the US, Euro-zone and China. And the reason why the back-end of this week is significant is that key data is released out of all three that will illuminate whether markets are correct with their current bullish-view. The ECB meet this evening, with their thoughts on the continent’s short-term growth to be closely perused. US CPI and FOMC Minutes will be assessed in the context of confirming whether US interest rates will remain accommodative into the extended future. And Chinese CPI and trade balance will be carefully monitored when it arrives, too.
    Written by Kyle Rodda - IG Australia
     
  10. MaxIG
    Calmer trade, vigilance remains: The sense of cautious optimism in markets remains. Extreme swings in sentiment have been absent. Calm prevails, albeit within a mindset of greater vigilance. There hasn’t been a face ripping rally, nor a vertigo inducing fall, in global equities this week. The trading activity does feel distinct from that which was experienced in December. Fear and subsequent volatility is unwinding. The VIX continues to edge lower, though at a slower pace now. Several of the panic-inducing issues that drove the bearish activity in markets in the last quarter of 2018 appear to be progressing positively. But it’s understood that in the case of almost all these matters, ranging from slowing global-growth, to the trade-war, to Brexit and to Fed policy, that there is much more to unfold.
    US stocks await their test: An inflection point will arrive where market participants will have to decide whether to push this rally in global equities from simple bounce to true recovery. The United States stock market sits at the epicentre of financial market volatility right now and judging by the price action on the S&P500, we may be inching towards that point. Putting aside the nuance of individual geographies, the S&P500 has set the tone for trade in the rest of the world’s markets. As it stands, the index has demonstrated an initial higher low, following its recent bottom at 2350. The Bull’s fight really begins now, as traders eye a cluster of resistance levels between 2580 and 2630, which will determine in a big way whether this rally has legs.

    The risks and opportunities for US bulls: The impetus to get US stocks through that cluster becomes the question. We’ve arrived at this juncture courtesy of confirmation of a still-strong US labour market and a dovish-Fed. That is: good data, and (relatively) easy monetary policy conditions going forward. From here, to sustain the market’s run, that’s what the bulls want to see. There are several opportunities coming up toward the back-end of the week to test these two parameters. FOMC Minutes get released tomorrow, Fed Chair Powell speaks on Friday, and US CPI data is released early Saturday morning (AEDT). Moderate inflation and a cool, supportive and deliberate Fed is what bulls are after. An overshoot of the former (which isn’t expected) and a more Hawkish tone from the latter could drag the rally-down.
    Geopolitics: trade-war and Brexit: There are a couple of other not-so-fundamental macro-events that may also dictate sentiment. The trade-war and the ongoing negotiations between the US-China in Beijing is one; the other – and this is very much secondary to the trade-war – is Brexit and the upcoming “meaningful vote” on a Brexit bill in the UK House of Commons. Trade war negotiations are progressing well, from what is being reported: talks have been extended another day, as China’s top economic policy maker, Liu He, joined the fray in the past 24 hours. Brexit is looking far less optimistic. In-fighting and chaos remain in UK Parliament and in the Tory party, in-particular. Article 50 looks as though it could be extended, however a no-deal Brexit still appears the likely outcome at this stage.
    Risk remains “on”: The confluence of stories has developed into a metanarrative that is supportive of risk-taking. It must be said that the fundamentals haven’t changed that much, however sentiment has shifted and markets are now playing follow the leader. The effect of this in the last 24-hours saw gains in global share-indices (with the notable exception of China), another leg lower in global bonds, a lift in commodity prices, a contraction in credit spreads, and a bid-higher of riskier growth-currencies. The US Dollar climbed slightly overnight, but that was mostly due to a weaker EUR and Pound following Brexit developments and very weak German Industrial Production data. Gold, the proxy for risk throughout the recent market volatility, continued its pullback courtesy of the stronger greenback and generally lower risk-aversion.

    The ASX200’s climb: SPI Futures are pointing to a lift for the ASX200 this morning, of about 19 points. The Australian share-market is demonstrating activity still below average, though well within the normal range for this time of year. Nevertheless, the bulls did well to maintain control of the market yesterday. Following a sputtering start that saw the ASX200 dip below its opening level, the buyers wrestled control of trade, and after several attempts, managed to push the index clear of resistance at 5700. Breadth was solid at a 70.5 per cent, and every sector finished in the green for the day’s trade. Promisingly too, two of the better performing sectors were health care stocks and information technology stocks, revealing an appetite for growth by investors.
    The Aussie market’s test: Like its US counterpart, the ASX200 confronts a handful of resistance levels that mark potential inflection points. The resolve of the bulls has proven ample this week in general: downward sloping trend-lines have been broken, and yesterday the index managed to close above its 50-day moving-average. Such with the S&P500, a higher-low has been established in the price, follow the recent bottom at 5410. The hurdles for the market in its bid to prove a recovery in the day ahead is twofold: major trendline resistance, traced back to the ASX200’s decade-long September high, exists at a scratch above 5670, before a play to 5780-5800 exposes itself. A break and hold above these levels will add credence to the notion a bottom has been formed in the market.

    Written by Kyle Rodda - IG Australia
  11. MaxIG
    Stocks finish week on solid footing: Global equities finished last week on a solid footing. Across Asia, Europe and North America, the major share indices closed both Friday and the week in the green – the only notable exception being the FTSE100, which has dipped (typically) because of a stronger Sterling. The solid run into the week’s close came courtesy of more friendly-trade-war headlines, suggesting that significant progress is being made in US-China trade negotiations. A bit of headline jumping, sure. But these headlines were a little brighter than what has been received of late. In short: a final agreement on currency manipulation has been reached, an extension of the trade war truce is likely, and a trade-deal is more likely happening than not.

    Risk appetite piqued: This is all according to US President Trump, so the gut says it be taken with a pinch of salt. Equity traders heard enough, however, driving the rally in global stocks. Chinese equities led the gains on both the daily and weekly charts: the CSI300 was up 2.25 per cent on Friday and 5.43 per cent for the week. Growth currencies also rallied into the week’s close. The AUD has climbed back to 0.7129, the NZD is fetching 0.6844, and the CAD (supported by higher oil prices) has broken above 0.7600 once more. Most promisingly of all is price action in commodities. The Bloomberg Commodity Index is at a YTD high, led by a break higher in copper prices.
    Venezuela and oil: In commodity-land, arguably as it always is, oil is hogging the conversation. News in the last fortnight that the Saudis intend to deepen production cuts has formed the fundamental basis of oil’s rally. The short-term factors though pertain to the humanitarian crisis unfolding in Venezuela. The (possible) impending civil war aside, the prospect of social and economic chaos in Venezuela has lifted the price of WTI to levels not registered since November last year. Furthermore, the spread between the active WTI and Brent Crude contracts is expanding – to levels not seen since September 2018. It gives the sense oil is on the cusp of a true break-out – and putting behind it the collapse it experienced in 2018.
    Oil’s omnipresence: The importance of oil in the context of fundamental economic strength, along with financial market activity ought not to be understated. One of the key drivers of Wall Street’s major correction in Q4 2018, as well as the US Fed’s adoption of a dovish stance to interest rates, was the collapse of oil prices. Some of the junkiest of US junk-bonds are held by highly leveraged shale-oil firms, meaning the collapse in oil prices last year greatly increased credit-risk in US markets – dragging down equity prices with it. Furthermore, the fall in energy prices dragged diminished inflation expectations, inhibiting the US Fed’s ability to reach its mandated inflation target of 2 per cent subsequently.

    The financial markets’ contradiction: While it has to be said it isn’t the most important variable in financial market activity more-often-than-not, a constant awareness of oil prices is valuable. The two-top themes that are of greatest concern to market participants is the interplay between Fed policy and the growth outlook. If one digs down here, there is a contradiction presently between both narratives, which opens the possibility for volatility somewhere down the line. The Fed has definitely given the greenlight to be bullish, and chase yield in risk-assets. This is what’s propping-up US stocks. The dilemma is, though, earnings growth is deteriorating along with the global growth outlook – a trend that could strip most-incentives to pile into stocks any further.
    The rates and earnings balancing act: The fact is the S&P500 has never posted a positive year when annualized earnings growth has contracted. The US reporting season is coming close to being done-and-dusted, and on a quarterly basis, earnings contracted on an annualized basis (in aggregate) across Wall Street equities. Forward earnings estimates still have US stocks experiencing respectable growth in the year ahead, however there has been a recent trend of downgrades in this metric. Expectations are that the Fed will stay steady this year, before cutting interest rates in 2020 or so, which will support stocks. The basis of future gains will be striking the right balance between sustaining positive earnings and experiencing interest rate setting that keep financial conditions supported.
    The ASX to follow Wall Street: Either variable could turn on a coin, but this is being read as a low probability at the moment. The S&P500 looks quite adamant it wants to challenge 2815, at which that index failed on several occasions to break through late last year. Although more sensitive to the global growth narrative, the ASX200 is taking its lead from Wall Street, and eyes its own milestone of breaking September’s closing price at 6230. Rallying commodity prices will underpin the ASX200’s strength, as will the tumble in bond yields, which are still adjusting to the prospect of rate cuts from the RBA. Just in the day ahead, SPI Futures are indicating an 8-point jump for the index at today’s open.

     
  12. MaxIG
    The control of the market: The bulls and bears are circling one another, with neither to take control in a meaningful way this week. There is a vacillating in sentiment, maybe as each side recognizes that not enough information has emerged this week to tip favour towards one camp or another. Moments like these can be opportunities whereby markets build to a breaking point. It becomes a matter now of waiting for the necessary evidence to buy-in or sell-out. Headlines are determining intra-day moves in presently, as traders jump at shadows any time the theme of “global growth” or “trade war” arises. The impact of such stories appears to be diminishing now: and impatience has developed. Market participants want substance before they commit themselves to their next move.
    The imminent catalysts: It won’t be long before such opportunities arise. US earnings season remains one of them, and overnight earnings beats by the likes of IBM and Procter and Gamble galvanized temporary upside. A slew of PMI figures out of Europe will also be released, before central bank policy comes to the fore too, with the ECB due to meet on Thursday. As can be inferred, the next 24 hours may well centre on Europe, and its apparently ailing economy. Recall, it was the last round of PMI figures released out of Europe that showed a contractionary figure in that measure in several sovereign economies. Coupled with what is assumed to be a dovish ECB President Mario Draghi tonight, and the outlook for global growth may prove up for revision.
    Geopolitical noise: Other ongoing geopolitical concerns will dominate, too. Momentum in trade war negotiations has seemingly diminished, adding urgency to those talks. Davos is delivering fodder for intellectual debate about the state of the markets, though little has come yet of market-shaking significance. And Brexit-drama keeps is keeping its hold of a big part of trader’s attention. Relating to Brexit, the GBP continues to appreciate, for reasons easy to rationalize but hard to truly understand. The Cable maintained its short-term rally overnight, breaking through 1.30, on what seems to be a market pricing in the real prospect of a delay of Brexit beyond the March 29 D-Day. Far be it to argue with the will of the market, but that could prove misguided and prone to correction.

    Australian jobs numbers: It’s not of broad-global significance – as it shouldn’t be, with the history defining events taking place in global-macro presently – but Australian employment figures will be one to watch this morning. Economists are forecasting few changes to the employment outlook: the unemployment rate is tipped to remain at 5.1 per cent, aided by estimated jobs growth of 17.3k last month. The labour market is as strong as it has been for the best part of 7 years, as the Australian growth engine hums a long at a respectable rate of knots. Rates and currency markets are reflecting this dynamic: expectations are for a fall in both, but the strong backward-looking data are keeping pronounced swings in these markets at bay, despite a weakening global outlook.
    Aussie economy health-check: A surprise in today’s labour market figures would of course lead to a touch of greater volatility. Markets are pricing in something of a slowdown in the Australian economy this year: interest rate markets have an implied probability of 40 per cent that the RBA will cut rates this year. The reasoning is simple enough to understand: major concerns are building about the strength of the Chinese economy, and Australia’s domestic property market has recently accelerated its decline. The two pillars of our economy, mining exports and residential construction, are vulnerable to this set of circumstances. While it is of low probability it will show up in today’s numbers, the pessimists are waiting for gloomier outlook to show-up in tier 1 indicators, such as employment numbers.

    Chinese policy intervention: Australia’s status as lucky country will hinge greatly on China’s ability to stimulate its way out of trouble. Policymakers are ramping up these efforts, only yesterday introducing a new policy tool to deliver credit to businesses, via safe and stable financial institutions. That news bolstered sentiment fleetingly, particularly towards Chinese equities and the markets exposed to them. Confidence isn’t high yet that these measures will be successful, with traders really waiting a true breakthrough in the trade war. It is in part what lead to the “risk-off” tone to the week: stocks are off their highs, and safe havens like US Treasuries are somewhat in vogue. It feels like a major boost is needed to reignite the bullishness that has fuelled January’s recovery rally.
    Wall Street’s lead for the ASX: Entering the final hour of US trade and Wall Street stocks are clawing their way back into the green. The Dow Jones is up, courtesy of the solid IBM and P&G results, but the S&P is currently flat, wrestling with what is becoming a key pivot point at 2630. SPI Futures are translating Wall Street’s lead into an expected 8-point drop at the open, backing up another day of losses for the ASX200. It must be said that it was a battle throughout the day between the buyers and sellers on the ASX on Wednesday. The sellers took the biscuits in the end, with selling heightening in the last hour of trade. 5780-5800 is where the index may find its support in the short-term and determine whether a further sell-off is looming.
    Written by Kyle Rodda - IG Australia
  13. MaxIG
    Fed sparks bullish sentiment: Traders were bullish overnight, but as far global equities go, the ultimate results were mixed. Activity has been very high, that’s irrefutable. Volumes flowing into stocks have been much higher than average, no matter where you look. Fundamentally, the Fed has lit a fire under markets, and traders are repositioning to adjust to a new set of circumstances. The fundamentals have shifted in quite a meaningful way. It’s the notion that the Fed will maintain monetary policy support that has made this so. A world of relatively easy monetary policy and loose financial conditions has market participants believing the record bull-run can be sustained. It may prove fleeting, merely a boost in sentiment, but at the very least today, markets have found their justification to buy-in.
    Bond markets start to adjust: Look no further to rates and bond markets to see the true impact of what the Fed has done. US Treasuries had been a boring market to watch for most of January, at least when compared to the events of late 2018. The US 10 Year note had been less than a 10-basis point trading range. The ultra-dovish Fed yesterday morning put an end to that. Implied probability for a rate hike this year from the Fed has for all intents and purposes has now been erased. By the end of the year, interest rate traders see little more than a 1 per cent chance that a rate hike will occur. US Bond yields have tumbled consequently, with the US 2 Year Treasury now yielding little more than current US Federal Funds rate.

    The greenback smack-down: The US Dollar is losing its advocates it seems. The pro-Dollar cheer squad espoused two reasons to justify their hitherto bullishness: if the economy regains its strength, then that means higher US rates, ergo a stronger greenback; if the economy goes into decline, that means greater risk aversion, ergo a stronger greenback. That idea is very cogent and could prove true in time, but here-and-now, the price action flies in the face of Dollar bulls. The USD is well off its highs, and although receiving a lift from a weaker Euro last night, a lift in our Australian Dollar (along with other risk-currencies) to above 0.7260 suggest traders are more than happy to short the greenback where it presently trades.
    Global economic data shows further weakness: Which leads to the irony, or perhaps contradiction, in financial markets at-the-moment: global growth keeps showing signs of a synchronized slow down. A weaker global economy in 2019 is all but a given if you listen to the analysis of the global economic elite. Last night though, markets were delivered another dose of reality about what the “real” economy is up to. A truckload of macro-data was released yesterday, and though there were some solid numbers here-and-there, most of it was quite ugly. Canadian GDP figures showed a contraction in growth for the quarter, German Retail Sales data missed by a long way, Chicago PMI disappointed, Italy is entering a technical recession, and Chinese PMI figures remain in contraction territory.
    Trade-war pain hurts Europe: It didn’t help sentiment toward global growth that US President Donald Trump decided to hit Twitter to discuss the trade war overnight. He said nothing inflammatory, in fact he was quite positive about trade negotiations. However, the US President made quite clear that a trade breakthrough couldn’t be expected until he and Chinese President Xi Jinping sat down to nut out the final details. Seemingly, European markets copped the brunt of that news, and it showed up in its currency and fixed income markets. The EUR was down across the board last night, as German Bund yields collapsed to a 2-and-a-haf year low -- primarily as recession risks in the European economic bloc, and a subsequently idle ECB, forced traders to price-out the prospect of monetary policy normalization in Europe in 2019.
    ASX200 bucked the theme: Not that is represents much, but the to-and-fro between the optimism regarding a more dovish Fed, coupled with the grow anxiety elicited by slowed economic growth, has SPI futures pointing to a slim 5-point gain for the ASX200 this morning. Defying the theme in global markets yesterday, the ASX200 closed just shy of -0.4 per cent lower for the session, sustaining most of its losses during the after-market auction. Notably once again, the index failed to break through stubborn resistance at its 200-day EMA, selling-off that point once more during intraday trade. Upside momentum is diminishing in the market in the very short term, but perhaps in favour of the bulls, an ascending triangle pattern has emerged in the price action, maybe signalling an upside break is building within the market.

    The Fed, Hayne, and Iron Ore: The down day in Aussie stocks could be interpreted as a sign bearishness is gripping traders, but yesterday’s activity should be put into the context that the sell-off into yesterday close was probably symptomatic of a bit of end of month rebalancing in the market. Financial stocks are languishing too, as traders apparently stay out of the space ahead of Monday’s release of the final report from the Hayne Royal Commission. The beacon in the market has been the materials sector, owing to the recent rally in iron ore prices, following the devastating Vale disaster, which has thrown into question the safety (and therefore future productive capacity) of the mining industry in Brazil. To see a day in the green today, it may rely on mining bullishness outstripping banking-sector bearishness.
    Written by Kyle Rodda - IG Australia
  14. MaxIG
    Written by Kyle Rodda - IG Australia
    What’s making headlines: There’s an hour and a half to go in the US session and global equities are up. Let’s assume they finish that way – there is plenty of room for clarification (and rationalization) late-on, if need be. Traders have taken the new green shoots in the trade-war and spun them into a positive narrative. Sure, the old green shots lay trampled below the new ones, but perhaps this time around the positivity will be given a chance to thrive. The other story hogging headlines in the financial press is the vote motion UK Prime Minister May’s leadership of the Tories. Market confidence has been shaken by that development, but as we wake-up this morning, the balance of opinion seems to be suggesting that May will win the day.
    The data side-show: Politics is driving markets still, which is always dangerous – it’s often a distortionary influence on prices rather than a revealer of fundamental facts. However, the fundamental economic data that was handed to traders overnight supported their optimism. Arguably the most significant release for the week, US CPI figures delivered a bang-on forecast number. If you’re a bull, locked in an environment where there exists fear of a global economic slowdown on one side, and fears about higher global interest rates on the other, a moderate outcome to any data-release is welcomed. Fundamental data last night was light otherwise, with US crude oil inventories the next most important release. It overshot forecasts, but still showed shrinking supplies, which boosted oil prices and (at the very least) didn’t detract from the bullish sentiment.
    ECB on tap: The next release on the data docket is the ECB meeting tonight. It’s that central banks last meeting for the year and ought to be watched, considering all this talk about slower growth and hawkish central bankers. Given the noise in markets and the gradual stagnation in the European economy, it’d be a might surprise if ECB President Mario Draghi and his team deliver any surprises. The situation across Europe is fraught with political, social and economic danger. No central banker is going to want to light a flame under all of that. Going into 2019, France is burning, Italy is agitating for change, the UK is still trying to bail, and the custodian of it all, Germany, is about to lose its steady hand in leader Angela Merkel. The politico-economic landscape doesn’t inspire much confidence in the grand European project, and the ECB will probably reflect that.
    Another faded rally? Nevertheless, as mentioned, traders are taking in their stride the ever-present risks in this market. (Stream of consciousness status update: US equities are giving up their gains with about an hour-and-a-half in trade to go, however they remain ahead for the day. Again, let’s check in on that later.) The core question at hand on bullish days is to what extent are rallies a reflection of market-reality or mere perception. US stocks have ended as of today its latest downtrend – another in a line of aggressive sell-offs and rallies within what is overall a sideways pattern since the middle of October. There must be scope for a break-out from this pattern at some point soon. The S&P500 eyes the 2800 again now: maybe we assess the strength of the bulls by their ability to return US stocks to that level again.

    ASX200: SPI futures are tracking Wall Street’s performance this morning, as they are wont to do, suggesting an open 5 to 10 points higher for the ASX200, at time of writing. The performance of Australian equities yesterday was solid, in line with major regional counterparts, as fears of trade-wars abated once again. Volume was ample at 15 per cent above average and breadth came-in just below 80 per cent. Each a sign of strong bullish conviction. It seems a desire to get into cyclical, economic-growth stocks constituted the essence of yesterday’s sentiment. The greatest activity was to be found in the materials, industrials and consumer discretionary stocks. Irrefutably, this is a good sign for the many who hold optimistic-enough views on global growth; the test will be whether this view can be vindicated leading into the end of the year.
    The seasonal kick? The success and failure of the ASX200 will be strongly correlated to what happens to US stocks for the rest of 2018. It figures: the core issues in the market relates to the ongoing strength of the US economy, and how hawkish the Fed may-or-may not be. There is probably an inherent disconnect on some scale of looking at our market through that lens. The ASX200 never truly saw the parabolic rise in prices that the major Wall Street indices did during the easy money era (Australians engineered a residential property boom instead). All the same, if seasonality is a guide, a December run higher is on the cards come the last half-of December. The measure of any run’s sustainability should roughly be assessed by the index’s ability to challenge levels at 5705, 5790 and 5880.

    Price-check: The North American session is nearly at its close. Time for a review on the price action. Wall Street is off its intraday high but has still managed gains over 1 per cent. The benchmark S&P500 is 1.2 percent higher. This backs-up a day in which the DAX and FTSE rallied 1.4 per cent and 1.1 per cent respectively. US 10 Year Treasury Yields are up to 2.90 per cent, and the yield on US 2 Year Note is up 2.77 per cent, widening the spread there to 13 points. Credit spreads have also narrowed. Higher risk appetite has seen the greenback sell-off. The DXY is at 97-flat, thanks in part to a Euro that’s fetching 1.1375 and a pound that’s buying above 1.26. Gold is slightly higher $US1245. The growth-optimism has boosted our AUD to just above 0.7225, while oil is up, and copper and iron ore are down.
  15. MaxIG
    A little bit of everything: It certainly wasn’t the highest-impact day market participants have experienced so far this year, but there was a spoonful of everything, thematically speaking that is, driving the macro-economic outlook for markets in 2019. To keep it high level, there was a series of significant growth-related data released out of all three of the world’s major economic geographies – China, Europe and China – plus a healthy smattering of geopolitics and corporate news to keep traders interested. Only, if you look at the price action, one might say that it didn’t amount to terribly much. Global equities are taking the middle road, posting a mixed day, as Wall Street creeps towards its close at time of writing; though some shifting in currency, rates, bonds and commodities markets has occurred.

    Markets immune to trade-war headlines: Fresh trade war headlines are at the top of the list of headline risks, however in contrast to what’s been seen in the past, the reactions have been muted. Arguably, and barring any news that hints at a true resolution in the trade war, stories that the US and China are getting along just fine are becoming (relatively) ineffectual. Yesterday saw the news that the Trump administration is considering pushing the White House imposed March 1 deadline for trade negotiations back another 60 days. The developments saw the standard risk assets shift – Australian Dollar-up, Asian stocks-up, US futures-up, commodities-up – but compared to the massive relief rallies seen in the past, the price action indicated a market that’s wanting more than just piecemeal developments in trade-negotiations.
    US Retail Sales a shocker: Hence markets moved past that news, as the tradeable appeal of trade-war headlines fades. The meaningful event market participants had marked into their calendar for last night proved of greater import in the end: US Retail Sales numbers for December were released and showed an abysmal set of numbers. In fact, they were so bad that the experts and the punditry have effectively written them off as a passing anomaly – one that can’t quite be explained properly. The figures themselves revealed US Retail Sales contract by a huge -1.8% in December, well below the “flat” figure estimated by economists. Though consensus is saying the data was too-bad-to-be-true, traders have adjusted their positions: bets of a Fed rate hike have been unwound back to effectively a 0% chance in 2019.
    US Dollar falls; Treasuries suggest slowdown: Naturally, the US Dollar has dipped, registering daily falls against most major currencies. US Treasuries have rallied too, which has probably very marginally benefitted stocks, with the yield on the 10 Year Treasury note falling 4 basis points to 2.65 per cent. As the Chinese and European economies slow, the US economy is acting as the fulcrum of global growth at present. Data points like US Retail Sales begs the question of how long this dynamic may last. A little while yet seems to be the popular answer. A look at what the US yield curve is doing is illustrative in this regard: the yield on 3- and 5-year Treasuries are below that of the 2-year, portending recession-risk in the medium term.

    No recession, but outlook still dim for Europe: The Euro was bolstered by its own set of economic data overnight. GDP figures were released for the Euro-bloc and the German economy, and while bad, they weren't as bad as forecast. The Eurozone's GDP came-in on forecast at 0.2 per cent, and while the German figures missed estimates and showed a stagnant economy last quarter, traders took comfort from the notion that at least the data hadn’t set Germany up for a possibly technical recession. Despite this, and the fact the Euro is edging back towards 1.13 again, there is a growing sense of inevitability about a European recession at some point this year or next. These things can’t be predicted of course, and perhaps a turnaround will occur, however the balance of probabilities looks to support the notion a recession is looming.
    Pound falls as Brexit reality hits: Continued Brexit uncertainty won't help Europe's economy, and markets were delivered a fresh dose of that too overnight. UK Prime Minister Theresa May lost another key vote in the House of Commons, placing in peril any chance of a Brexit deal, or at least a bill delaying Brexit, being passed. The Pound has returned to its (disputably) proper place, plunging back again into the 1.27 handle last night, and Gilts have climbed on the basis that a hard-Brexit will do no favours for the Bank of England and its bid to "normalise" it's interest rate settings. As always, the Brexit developments are being considered a problem unique to the European region, with little ramifications for broader markets. If Brexit accelerates Europe's into recession though, then this view ought to change.
    ASX showing signs of a pullback: SPI Futures are indicating a 2-point dip for the ASX200 at time of writing. The ASX200 is exhibiting signs of exhaustion now, as the market fails to push the index near enough or beyond the 6100 level. The conditions remain in place for future upside beyond that mark, but for now, market participants seem happy to either take profits, fade rallies, or just sit things out. The banks have unwound their gains following the post-Banking Royal Commission rally, and though it is showing signs of fundamental strength, a steadying in the iron ore price has mining stocks climbing, but at a careful tick. Hypothetically: if a pull-back does occur, 6000 will be a level of psychological significance, before true support around 5940 is exposed.

    Written by Kyle Rodda - IG Australia
  16. MaxIG
    Wall Street clocks new highs: Wall Street achieved a milestone overnight: it registered an all-time closing high. It in some way punctuates one of the more bemusing runs in US equities, following (what felt like) the near-cataclysmic market correction at the end of 2018. The S&P500 closed at 2933 this morning – a mere 10 points from that index’s all-time intraday high. As had been expected, the catalyst for US stocks’ latest burst higher came directly from US reporting season. A series of companies, including the likes of Coca-Cola, Twitter and Procter and Gamble, beat analysts’ expectations, inspiring hope that the feared “earnings recession” isn’t confronting the market after all.
    Can the good times last? The natural question to ask in these circumstances is: how far further can this run? This is especially pertinent give that the last two occasions Wall Street hit record levels, it was followed by major market corrections. A familiar point too: the previous market pullbacks were characterized by the evacuation of momentum chasers from the market, after US indices began to test “overbought” levels, somewhat like they are beginning to do now. The growth and earnings outlook then, as compared to what it is currently, was also much more favourable, giving credence to the notion that this market isn’t being supported by strong enough fundamentals.
    Valuations are (relatively) favourable: Of course, it’s impossible to predict these things with any certainty; however, for US equity bulls, confidence can be taken from a few facts. The first, is that that valuations aren’t looking quite as stretched as they were in February 2018 and October 2018 when the last two corrections hit. As of today’s close, the S&P500’s price-to-earnings ratio of 19:1 is markedly below the 24:1 and 21:1 that defined those two market-corrections. Furthermore, yields are still attracting flows into stocks over other asset classes, with the S&P500 still boasting a relatively attractive 1.89 per cent yield overall.

    The core risk missing this time: As might be inferred from these statistics, the key risk absent now as compared to when the S&P500 hit its last record highs is the prospect of interest rate hikes from the US Federal Reserve. One might even suggest that the cause of and solution to Wall Street’s volatility has been the Fed. Recall: the February 2018 market correction was sparked by a surprise increase in US wage growth that forced bond markets to price in the greater prospect of Fed rate hikes; and the October 2018 market correction came subsequent to Fed-Chair Jerome Powell’s now infamous “a long way from neutral (interest rates)” comments.
    The Fed unlikely to remove the punchbowl: It was the unwinding, if not flat-out reversal of the Fed’s policy bias, that inspired the most recent ascent to all-time highs for the S&P500. And as opposed to the corrections of 2018, the chances that the Fed will “pull away the punch bowl” as this party is getting started is quite low. Instead, the muted inflation outlook, combined with economic and policy related realities, has led market participants to bet that the next move in US interest rates will be a cut. Hence, financial conditions are likely to be supportive of risks assets, with the key now ongoing economic, and corporate earnings growth.
    ASX to join the party? In light of Wall Street’s quick-sip of euphoria, SPI Futures are suggesting that the ASX200 will back up yesterday’s strong showing and add around 20 points at today’s open. Though missing true volume through the market, the ASX demonstrated signs of robustness during Tuesday’s session, with breadth solid at 76 per cent, every sector in the green, and the major energy, mining and financials stocks all adding substantially to the index. It was enough to push the ASX200 into and beyond the 6300 level, and clock highs not witnessed for Australian stocks since September 2018.

    Event risk centres on Australia today: A few supportive inter-market variables have underwritten the strength of Australian stocks this week: a tumble in the Australian Dollar, and Australian Government Bond yields. Arguably, it's in anticipation for today's headline event-risk that this has been so: quarterly local CPI figures. Though not as significant as labour market data to the RBA, the inflation numbers will offer some insight into the RBA's potential next move. Australian inflation, as it has been globally, has been stubbornly low. A matching or missing of today's 1.5 per cent estimate for CPI only adds weight to the idea the RBA's next move will be a cut.
    Written by Kyle Rodda - IG Australia
  17. MaxIG
    “A tale of two cities”: As far as Australian markets go, they’ll be defined, broadly-speaking, by the unfolding “tale of two cities” story in global markets. That is: the renewed optimism about the US growth outlook, versus the deterioration in global economic prospects, led by the slowdown in China’s economy. The Australian economy is heavily geared to the latter, so the hunch is our fortunes will be more greatly impacted by that variable. But it won’t be clear cut, and that’s where the uncertainty and opportunity may emerge. The last 24 hours of trade presented a series of curious themes for market participants, with the subsequent price action patchy. What transpired did shift the narrative somewhat, setting the foundations for an interesting week next week.
    Chinese (and global) growth: First, the darker side of (the all too crude) binary: a view on what’s happening in China and the world ex-American economy. The Asian session yesterday was preoccupied first by political theatrics, then macroeconomic information. The Cohen testimony gripped attention, however proved more a distraction as far as traders’ were concerned. The falling apart of the Trump-Kim talks in Hanoi disturbed markets, mostly in North-East Asian markets, such as the KOSPI, before the conclusion was drawn that a grand-peace pact between the US and North Korea was an absurd fantasy to begin with. The true focus was on China’s PMI numbers during our Asian trade – and how, once more, very disappointing they were.
    Chinese markets’ bullishness: China’s equities betray a market that sees hope in the Chinese economy. Even despite a slight pullback this week, the CSI300 is still up nearly 21 per cent year-to-date. The data market-participants are getting doesn’t yet support this behaviour, though. Yesterday’s official PMI numbers revealed a manufacturing sector still in contraction by that measure, and a services sector that is softening progressively. It’s probably a combination of the PBOC’s extreme stimulus measures, designed to pump liquidity into the Chinese financial system and boost the supply of credit, plus favourable trade-war developments, that is supporting Chinese equity indices. Both are sentiment boosters, sure. But the market, in the long term, will need more than that to sustain this run higher.

    Are commodities leading the way? To play a bit of ****’s advocate: some (arguably contrarian) punters are suggesting that current market consensus is all wrong. The growth outlook, while not as bright as the end of 2017 and start of 2018, is still reasonably solid. Just look at commodities: copper is leading the way, having broken its recent range to the upside, and now looks poised for a further run. And the gold-silver ratio – a rough but handy barometer of risk-aversion against the growth outlook – is registering an 84 reading. By historical standards, this is high, and may indicate that after all this talk of bear markets, and a synchronized global growth slowdown, the global economy still has some juice left in it yet.
    US growth: The other, slightly less ambiguous side, of the “tale of two cities” binary is the US growth story. It was on shaky ground in January and Early February, however last night’s US GDP reading went some way to re-ignite hopes the US economy remains on sound footing, for now. The headline figure exceeded expectations considerably, printing at 2.6 per cent versus a forecast 2.2 per cent, on a quarterly basis. Though it hasn’t manifest in equity markets – all too often good macroeconomic news is seen as bad for risk assets because of its implications for interest rates – US Treasury yields lifted markedly, as interest rate traders rapidly unwound their bets on a Fed rate cut this year.
    The US Dollar: Of course, the higher yield dynamic for US denominated assets has generally lifted the US Dollar. As it pertains to the Australian Dollar, the yield spread between 2-Year US Treasuries and 2-Year ACGBs has expanded to 83 basis points, guiding the AUD/USD below 0.7100 once again. Also, a function of the US Dollar, gold prices have broken a short-term trend, suggesting its overdue pullback has arrived. In the medium to long term, a strong argument can be made that the trend lower in global yields and the voracious buying of gold by some of the world’s biggest central banks will underwrite gold strength. Here and now though, and gold looks poised for a brief and necessary wave lower.

    ASX200 waiting for a push: Forever one of the many layers of meat in the global economic sandwich, the ASX200 will take the themes twisting markets, and translate them, according to SPI Futures, into a 7-point gain at today’s open. If Wall Street’s lead were to be followed, an indecisive and uninspiring day might be on the cards for the ASX. Following yesterday’s solid CAPEX numbers, domestic growth is less a concern; and market internals suggest that that although this rally is long in the tooth, there’s the technical capacity to run higher. But with reporting season ending now, a macro-catalyst may be required to spark the next run higher for the ASX200: earning’s growth will likely come-in flat YOY, dampening the market’s crucial fundamentals.
    Written by Kyle Rodda - IG Australia
  18. MaxIG
    Stock markets continue to recover: Global stocks have maintained their bounce. It’s looking more like a market that is searching for it’s next high now, as price action, from a technical perspective, suggests the recent wave-lower is over. Hence, from here, considering trade-war risks, and therefore anxiety in the market, remains high, the matter becomes whether stock indices are preparing to pop in a new higher-high, or whether what we will see is a new lower-high. The result of that simple binary will inform market participants what the broader trend is in the market: are we still trending higher, or are we seeing the start of a trend reversal?
    The litmus test to come: This commentary pertains primarily to the S&P500, which has been the bellwether for global equities, recently. But it could equally be said of the ASX200, too, which demonstrated its resilience yesterday. Just sticking to the S&P500, the price set-up offers some potentially interesting insights about the world, in the weeks to come. Another high for US stocks is another record high and a clear continuation of that market’s bull run – defying, really, what is a deteriorating global backdrop. If this fails to occur, then talk will certainly emerge whether stocks are beginning a prolonged period of weakness, in line with clearly softer fundamentals.

    The signs of nervousness: Time will tell, of course, and all manner of things can change this underlying dynamic, in the long term. However, as it relates to the here-and-now: though the tension eased in Wall Street and European trade, safe havens are still in vogue for investors, currently. US Treasuries have pulled back overnight, but yields have kept close to their recent lows, and traders have flooded into the US Dollar. German and Japanese bonds are still in negative yield territory, removing some of their haven appeal, however the Euro, Yen, and (at that) the Swiss Franc are still broadly catching a bid.
    Trade-war keeps escalating: Conspicuously, gold prices are lower, but that’s a function of the much stronger greenback, while commodity prices have generally rallied across the board. That behaviour probably belies yesterday’s news flow, which was preoccupied with another small escalation in the US-China trade-war, after US President Donald Trump paved the way for sanctions on Chinese mega-company Huawei. The dynamic probably manifested in global-growth sensitive currencies more than anywhere else.  The Nordic Currencies, the Canadian Dollar, the Kiwi Dollar, and our own Australian Dollar continued to sell-off overnight, on the presumption that Chinese economic growth will be further stifled by US trade-aggression.
    Australian jobs data disappoints: Speaking of the Australian Dollar: it registered a new low in the last 24 hours, and is now cosying up with the 0.6800 handle. The driver was yesterday’s local employment numbers, which was probably, on balance, a negative one overall. On the plus side: jobs growth exceeded expectations and the participation rate moved a little higher. But crucially, the unemployment rate climbed, and the jobs added to the economy last month (according to the data) were predominantly part-time jobs. Also underquoted, but perhaps more importantly, was a big tick-up in the underemployment rate, which rose from 8.2 to 8.5 per cent.
    The problem with the jobs data: So: this is the kicker, as it applies to the jobs data: the problem the market sees in the numbers doesn’t directly stem from the unemployment rate or jobs change numbers per se. The ****’s in the detail, and the details suggest that considerable spare labour capacity exists in the Australian economy, at-the-moment. Crucially, for financial markets, this means one thing: that the long pined-for lift in wages growth is unlikely to be forthcoming. By extension, this likely means further weakness in inflation, and probably consumption too, which, if left unmanaged, will drag on economic activity moving forward.
    The need for economic stimulus: Hence, it’s this general perception that has driven traders to price in a fifty-fifty chance of an RBA interest rate cut next month; and also, price in a full cut by July, as well as more than another full cut on top of that by year end. This development comes at a fortuitous time, too. The election is upon the Australian electorate, and promises from both sides of politics to adopt stimulatory measures, by way of income tax cuts and major infrastructure spending, is giving hope that the government can juice the economy just enough to guide it through this current soft patch.

    Written by Kyle Rodda - IG Australia
  19. MaxIG
    Written by Kyle Rodda - IG Australia
    A big bounce, but a bottom? There’s little shortage of folks calling a bottom in the market this morning, but in truth it’s too early to tell if we are there yet. Sentiment indicators and other market internals suggest that the market could be oversold right now, however a short squeeze here-and-there and a shake-out of a few opportunistic bears doesn’t necessarily mark a change of trend. It’ll be returned to towards the end of this note, but in the interest of providing context, Wall Street is registering a solid day of activity, with its three major indices up over 2-and-a-half per sent so far in the session. It’s setting up a solid day’s trading for the Asian region, and likely Europe when it re-opens tonight, on what poses as a thin albeit positive day for stocks.
    Wall Street momentum to lift ASX: After a two-day hiatus, Australian equity markets reopen this morning. The last price on SPI Futures is indicating a 35-point pop for the ASX200 at today’s open, though that price, it must be remarked, comes from its closing price on December 24th. A lot has transpired in the 48 hours-or-so during the Christmas public holiday period: immense sell-offs in certain markets, more political chaos and uncertainty in the US, and now an ample bounce in US stocks. Considering the time of year, the Australian share market is more than likely to experience another session of thin trade today. Monday’s session, for example, saw volume 63.40 per cent below the 30-day average. In saying this, though unsubstantial, Wall Street’s momentum looks likely to carry our market higher.

    The stories moving markets: The financial press has been comparatively quiet owing to the holiday period, meaning major headlines from the media-machine are lacking so-far this morning. A recap is in order, perhaps, to touch-on some of the market moving stories this week. Much of the focus has centred on the machinations of US President Donald Trump and his administration, predictably. Given the US Government shut-down, the US President, by his own admission, has spent much of his time “all alone” in the White House –  apparently pondering who to fire next. Of course, his ire hasn’t left the US Federal Reserve and its Chair Jerome Powell. But in the last few days or so, rumours are circulating faster that the latest career-fatality on the White House merry-go-round will be US Treasury Secretary Steven Mnuchin.
    Mnuchin’s mistake: One can somewhat understand the frustration of US President Trump toward Mnuchin: financial markets seemingly experienced a dose of it Monday, after the Treasury Secretary called a crack-squad of America’s largest bankers to confirm that the market was supported with ample liquidity. Trader’s hated the notion, labelling it akin to calling-out in a crowded cinema “Nobody panic, the fire department is on its way!”. It was this move by Mnuchin that hobbled already weak sentiment on Monday and resulted in the worst Christmas eve performance in US stocks in history. Fortunately for Mnuchin (and his job-prospects), traders have moved passed the gaffe; however, the disorder in Washington, and even more so the White House, remains an ongoing concern.
    Risk appetite piqued: With a little over an hour to go in Wall Street’s trading session, the solid gains for the day look likely to hold. Appetite for growth stocks has led the charge: the NASDAQ is up over 4 per cent presently, courtesy of a surge in Amazon’s share price on the back of reports of strong holiday consumption within the US economy. Oil prices have also rallied in response to a commitment from OPEC over the holiday break that it remains committed to managing production and supply. The dynamic has narrowed credit spreads marginally and provided further support for equities, while risk-on sentiment has culminated in a climb in US Treasury yields and the US Dollar, with the yield on the US Year note jumping to about 2.80 per cent

    US growth expectations unchanged: The curious matter behind today’s moves though, is that under the surface traders are still pricing in softer US growth. Although equities are up, along with the US Dollar and bond yields, interest rate markets are still moving in the direction of pricing out hikes from the US Fed in 2019. It must be said that US break-evens have bounced with equities today, implying on the 5-year spread a rate of inflation around 1.55 per cent. However, in absolute and historical terms, that is still very low – a fact reflecting as much in implied probabilities of US rate hikes. There is presently only 9-basis points of interest rate hikes being factored in by traders for next year, suggesting slower than forecast fundamental growth is still baked in to market expectations.

    The jury is out: It begs the question whether last night’s activity is just a technical bounce, driven by short term factors. Picking tops-and-bottoms in markets is nigh-on impossible, so any argument for or against whether we are seeing a dead-cat bounce, or a meaningful turnaround, should be read in that context. The matter is, the bearish-narratives that have led the market lower haven’t dissipated yet. As such, volatility is still high – above 30 on the VIX – and considerable rallies, like last night’s, is the norm in bear markets.  The trend is the best guide, and the shorter-term trend remains lower for now. It’ll take a while to get there, but a retest of 2600 for the S&P500 may validate the view a reversal is in play; further falls to below 2290/2300 would provide firmer confirmation that the post-GFC bull run is over.


  20. MaxIG
    Risk-off (again): Just when it looked like it was safe to jump back into financial markets, it was risk-off again overnight, as market participants dwelled once more on the myriad of risks facing them. There’s nothing entirely new in what has developed during the European and North American session: the same confluence of factors that has weighed on sentiment in markets have simply reared their head again. It’s probably what makes this situation all the graver, if not at the very least, highly gnawing. The anxiety riddling markets regarding the impacts of trade-protectionism, and the beginning of the end of the easy money era, can’t seem to be rationalized, inflating the magnitude of that issue – apparently inexorably. Fear is feeding on fear, making markets more attuned to the roar of the bears.
    Haven buying: As has been the case throughout the turbulent journey markets have traversed in the last week, it pays not to catastrophize; but the longer the weak sentiment lasts the more difficult it will probably prove to shake. As a trader, no matter the weather, opportunities abound for those willing to tackle them. It was havens again that attracted a bid higher last night, with gold (as old-reliable) catching the upswing. Carry trades were broadly unwound and kicked-down the likes of the AUD/USD to the 0.7100 handle, a dynamic causing the Japanese Yen to tick higher. 10 Year US Treasury yields maintained the line at 3.17 per cent, amid opposing pressure of haven buying and the carry-through of higher rate expectations, bringing the USD back into haven-vogue.
    Europe: European economics and geo-politics threw up some more major worries overnight, drawn out from the EU economic summit in Brussels. Markets over the extent of the week have priced-out an imminent Brexit resolution, pushing the Pound further into 1.30 handle and the Euro into the 1.14 handle. The greatest risk being priced in by markets however is renewed concern regarding Italy’s fiscal position – and Rome’s perceived belligerence towards Brussels’ bureaucrats. The EU slapped down Rome’s budgetary position, effectively labelling it untenable for both that country and the Union. European sovereign bond spreads widened more so in the last 24 hours, the greatest impact naturally being found in the spread between German Bunds and Italian BTPS, which expanded to almost 330 basis points – the widest margin since 2013.
    Global equities: The day on Wall Street, backing that up of Europe’s, has been a difficult one for investors, unaided by a session (of what’s being judged) of soft earnings reports. Two days of lukewarm company reports shouldn’t shift the dial of equity markets, but the hope that strong corporate profits would be the saviour from otherwise dour sentiment hasn’t yet eventuated. It’s forced market-bulls to doubt their conviction and fed the bears greater fodder to sell stocks. Consistent with recent themes, US big-tech and the NASDAQ (down 2.08 per cent) have generally led the sell-off on Wall Street over reluctance to go long growth companies, punctuating the shaky European session where the likes of the FTSE100 dipped 0.39 per cent, and the DAX shed 0.97 per cent – the latter in part due to a poor earnings report from market giant SAP.


     
    ASX yesterday: The lead garnered last night augurs poorly for the ASX200, reflected in an expected 66-point drop for the index according to SPI futures. The shame is that some semblance (or as close as can be found in these circumstances) of equilibrium appeared to return the Australian market yesterday. The tone throughout Asia trade, notwithstanding the struggles of Chinese markets, improved throughout the session, supported perhaps by the reported drop in the domestic unemployment rate, pushing the tepid Wall Street lead aside and allowing the index to recover early losses to close trade effectively flat for the day. Volume thinned as the session wore on to be sure, but breadth recovered to just shy of 50 per cent, revealing a willingness in market participants to acquire and spread some exposure across Aussie equities.

    ASX today: For all the contentment that yesterday engendered, in means little in the face of another day of likely heavy losses. The call in these instances is to assume the ASX200's (modestly sized) tech space, along with the health care sector, will lead losses. In saying that, the selling today risks being rather broad based, with a sell-off in oil prices and a wider dip in commodity prices a potential drag on the energy and materials sectors. The risks abound at this stage, but the major flashpoint will probably come mid-day when a massive data dump, containing GDP data, Fixed Asset Investment numbers and more, is released out of China. It provides a potential queue for investors to form a judgement on the Chinese growth story, and may prove to exacerbate or soothe investors’ fears regarding global growth.
     
    China: The bearishness in China is possibly the severest predicament of all – one that can only become worse today given the sweeping of bearishness through global equity markets. Depending on the index, Chinese equities have tumbled now by 30 per cent off this year’s highs, further entrenching a technical bear market. China’s equities overall look very oversold, with average PE ratios on the blue-chip heavy CSI300 circa 10:1, and presenting on the technicals just above an absolutely oversold reading. Simply, China’s equities can’t find a buyer, fundamentally due to potential fall-out of the US-China trade war. Undoubtedly, there are more complex and murky issues going on under the bonnet of the Chinese economic vehicle – the seemingly controlled devaluation of the Yuan by the PBOC apparently one – but a sell-off like this in spite of not that bad fundamentals suggests that investors can’t move passed the unknown whipped up the unfolding US-China trade war.

  21. MaxIG
    Written by Kyle Rodda - IG Australia
    Market sentiment: The final session of the week is upon us, and though a Friday can throw-up any number of shock events, the week has been a relatively good one for equity market bulls. Of course, this is primarily being led by a stable equity market in the US, but that strength has filtered through global equities to generate positive activity. Naturally, the ASX200 has benefitted from this dynamic, delivering an opportunity of circa 215 points for traders, based off last week’s lows. The risks to markets are still very elevated, but a dip in volatility below a 20 reading on the VIX has investors calmer than they were this time last week. Choppy trade and violent turns in sentiment could arise at any moment, and there is still some way to go to convincingly reverse October’s ugly sell-off. However, for the many who prefer to look on the bright side of life, signs of a turnaround are here.
    Overnight: SPI futures are presently indicating a very modest 3-point dip for the ASX200, on the back of an overnight session where risk appetite was high. Sentiment was boosted by positive Tweets (a statesman like medium for political discourse nowadays, of course) from US President Donald Trump relating to the US-China trade war. The news, coupled with weaker than forecast ISM Manufacturing data, led the USD to abandon its bid higher, pushing the EUR above 1.14 and the Aussie Dollar above 0.7200, as the yield on US 10 Year Treasuries slipped to 3.14 per cent. The strong sentiment was boosted by solid US earnings, building upon the cheer engendered by news in the Asian session that China plans to ramp up its economic stimulus efforts. While fears of a spike in oil prices waned once more, on news that OPEC output climbed by the most since 2016.

    European trade: Winding back the clock marginally further, European markets registered a more tepid day of trading. The DAX was up 0.18 percent while the FTSE finished a sliver higher than flat. Corporate news was lighter relative to the US, but the calendar was filled by numerous economic data and macro events. The biggest was the meeting of the Bank of England, who kept rates on hold and flagged that despite their rosy view on the British economy, their monetary policy settings will probably remain still for the near future. Irrespective, the pound continued to climb, aided by the weaker USD, but primarily on the basis that a Brexit deal will soon eventuate. European trade establishes a significant set-up for its final day of trade, ahead of a slew of PMI prints across the continent.
    ASX200 Yesterday: Reflecting upon yesterday's session for the Australian shares, the modest 0.2 per cent gain belies some of the significant stories moving the market. Trade Balance was gang busters, showing a trade surplus of over $3.0b, courtesy of a climb in iron ore prices generated by the recent round of Chinese economic stimulus. The miners naturally benefitted from the results, which added to already strong daily gains thanks to the announcement of a special dividend and share buyback from BHP. Even in light of the strong day for the materials space, it was the continued swings in the banks that truly dictated trade, after NAB posted results that were judged to not quite as bad as expected. The NAB closed the day higher as a result but was the only of the Big 4 to do so, as investors balance the positive news of signs of successful restructures by the banks, against the broader challenges of slowing credit growth and a cooling property market.
    US tech: A play into big-tech is what is leading Wall Street higher – a conspicuous risk given the tone of the recent market correction. The NASDAQ is the biggest winner of the three oft-watched US equity indices, registering gains of over 1 per cent. It would appear investors see a level of value in the US technology giants, even considering their proven vulnerability to shifts in interest rates expectations. It’s always a risk to bundle every US-tech company together and assume their fortunes are eternally correlated. The internet monoliths, Facebook and Twitter, deliver a vastly different value proposition than that of a Microsoft, Amazon or Apple – the latter whose earnings generally disappointed this morning. News on any one of the tech giants becomes of relevance to the index trader, but for the value-searcher, separating the substantial fundamentals from the fluff is a necessity.

    US equity market risks: The reasoning behind highlighting the (for many) well-worn distinction between the big tech stocks is that, on balance, risk is skewed to the downside across that industry. The US tech industry remains bolstered by money following momentum and flow in the pursuit of the next market unicorn. It’s what in large part keeps the market running higher despite a mix of valuations and tepid market fundamentals. The mega-cap staples in the US technology space can’t be ignored, and as market participants digest Apple results, it should be reminded that the biggest of these companies still appear investor essentials for many. Nevertheless, when reviewing the depth of the NASDAQ and its influence on US equity market strength, lowly dividend yields and relatively stretched valuations mean the performance of US indices overall are very liable to the sort of shocks witness in October.
    US Non-Farm Payrolls: The bounce in equities this week in mind, tonight's US Non-Farm Payrolls is of tremendous significance. Once again -- and as has been so for years -- the key number in tonight's release is the wage growth component, which is forecast to reveal annualised wages growth of over 3 per cent. If realised, it will prove a testament to the roaring power of the current US economy, already posting growth of 3.5 percent and unemployment at 3.7 per cent. Though for Main Street this is a refutably a good thing, a wage growth figure at forecast or above will be un-welcomed by investors, who will need to promptly re-reprice the higher likelihood of an aggressive Fed. This week's play into US equities has been underpinned by a significant drop in bond yields. If markets are forced to factor in an aggressive Fed once more, a replay of October's marked sell-off may return to equity markets.
     
  22. MaxIG
    Dead cat bounce in Asia? The ASX200 really couldn’t catch a bid yesterday. Most concerningly, it happened within a back drop of slightly higher volumes, showing that the sellers truly washed out the bulls throughout the day’s trade. The Asian region kicked-off the week sluggishly in general, unable and unwilling to run with the lead provided by Wall Street on Friday evening. The action in Asia prompted calls of a dead-cat bounce across global equities, something that has since been proven premature, based on the mixed day witnesses overnight in the European and US session. There just appears such a general reluctance for investors to search for value in the Asian region, despite the cold-hard numbers implying that pockets of it exists. Of course, P/E ratios and yields never tell the full story, and often lag actual changes in earning’s forecasts. Yet still, it does feel surprising, if not concerning, that the pockets of value that exist aren’t being seized by investors.
    Where are the buyers? It’s none-truer than on the ASX200, ahead of a day in which SPI futures are implying a 1-point jump at the open. The Australian share-market is presenting as a trifle oversold, with the daily-RSI stuck at multi-year lows, but downside momentum slowing-down only gradually. An absence of growth investors has stripped the Aussie shares of much of their bid, in-line with investor behaviour across most equity markets in the face of rising global rates, but again, the curious point – one that sets the ASX200 somewhat apart at present – is the missing search for underling value. In principle, it shouldn’t be too difficult to find: the sell-off across the local market has pushed yields just-shy of 4.50 per cent, while the project 1-year P/E ratio for the overall index is just above 14:1. It could be that a VIX above 20 is too higher to attract buyers at this stage – it will be an important litmus test for the market as to whether the ASX200 catches a bid when this unwinds.

    ASX Downside: To be fair, there are some considerable headwinds for Australian investors that may preclude them from behaving in the same fashion as their US or even European counterparts. The banks look ugly now – less so the hard numbers, but more from the superficial perspective that their brands have been (justifiably) diminished by the effects of the Financial Services Royal Commission. The best-yielders on the Australian share market are comprised in a big-way by the banks, so a lack of yield chasers in the market could come based on a sizeable reluctance to buy banks, even at apparently cheap prices. Following a day for the ASX200 that only saw the energy space catch-a-lift, entirely due to a since faded bounce in oil prices, buying impetus could be difficult to come by in the day ahead for the index, as support around 5800 returns to trader’s sights.
    RBA Minutes: It won’t change much the trading dynamic for Australian shares, but some useful insights regarding the Aussie-macro backdrop will be handed to us in the form of RBA Monetary Policy Minutes today. The interest generally will be directed towards any idea into the confluence of factors stifling the Australian households: financial stability will be one, a lack of wage growth another, so will high levels of private debt amid falling property prices, along with increasing retail interest rates, and (to a lesser extent) how global risks will affect the local economy. Despite the abundance of information, for traders, the dial probably won’t shift in rates market expectations that an RBA hike won’t come until 2020; nor in the AUD/USD, which will probably find support at 0.7100 even in the event of the most dovish tone to the minutes.

    China: Zooming out the microscopic lens for a moment: Australian financial markets are being served no favours by what is transpiring in Chinese markets. It was another rough day for China-bulls, who were legged by a fresh bout of selling after news broke that US President Trump – while riffing in an interview with CBS – may consider a fresh round of tariffs on the Middle Kingdom’s economy. Counter-arguments based on fundamentals aside, there seems to few willing to bet on a strong Chinese growth story at presetn. The comprehensive Shanghai Composite hit lows not registered since November 2014, while the narrower, blue-chip laden CSI300 languished around 2015 lows. This week will be illuminating for investors regarding whether the growth-outlook is indeed this poor for China, with CPI data day (for one) kicking-off a slew of Chinese fundamental data releases.

    Chinese growth, global growth: Perhaps it is so that the actions of Chinese policy makers are raising concerns about the country’s dubious growth prospects. Markets seem to interpret any policy intervention from the government or PBOC as a minor concession that things in the economy aren’t so great. The logic makes sense: there is the view that China’s economy is a touch opaque, and that Chinese data is prone to some level of manipulation. The offshore Yuan is manifesting signs of this scepticism, as the PBOC apparently conforms to the markets desire to devalue the Yuan, to potentially the key psychological barrier of 7.00. How far Chinese, and broader Asian indices, may fall before bottoming out is becoming an increasingly interesting question, as sentiment overrides the highly attractive valuations to keep the bears in control.

    Overnight: The underwhelming display in the Asian session translated into mixed European and US trade overnight. There was little depth of fundamental data, and though Brexit negotiations and fears of deteriorating ties between the global community and Saudi Arabia persisted, it wasn’t enough to incite panic in market participants. US Retail Sales disappointed slightly, but trade was defined more by a general lack of confidence in US investors: US Treasuries ticked higher and the USD dropped –benefitting gold again, driving its price temporarily above $US1230. A rotation away from growth stocks – that is, the tech-giants – continued by way of virtue of fears surround trade-wars and higher global rates, driving the NASDAQ lower, and  the Dow Jones and S&P500 weren’t able to catch and hold onto their early-bid, selling-off in late trade as investors struggled to grasp whether generally higher growth-risks will manifest in the upcoming earnings season.
  23. MaxIG
    Written by Kyle Rodda - IG Australia
    2018 reaches a climax this week: It’s effectively the last serious trading week of the year, and the economic calendar reflects that. Indeed, there’ll be a handful of days between Christmas and New Years to keep across, but with little news and thin trade, it’s tough to imagine anything coming out of them. The markets are still ailing, with the bears firmly in control of price action. There’s so many risk-events coming up this week, traders with a bearish bias are surely salivating. They did well to knock-off US equities in the final round of last week: the S&P500’s 1.9 per cent loss on Friday ensured another down-week for Wall Street. How this year is remembered and how next year will begin will in no small way be revealed in the next 5 days: if you’re a financial markets buff, it’s exciting stuff.

    Economic data: Concerns about future global economic growth tightened its grip on market participants last week. A slew of fundamental data was released across numerous geographies on Friday, and most of it was quite underwhelming. European PMIs undershot expectations, probably attributable in a big way to the impact of being caught in the middle of several domestic political crises and the US-China trade war. US Retail Sales data printed very slightly above expectations, to the relief of many, showing that the almighty US consumer is holding up well – at least for the time being. But it was a very soft set of Chinese numbers that had the pessimists tattling: the spate of economic indicators released out of China on Friday afternoon proved once more it’s an economy that is slowing down – and hardly in a negligible way.
    Recession chatter: Market commentary is continually focused on what prospect exists of a looming US recession. Financial markets, as distorted as they have become, do not necessarily possess strong predictive power of economic slow-downs. Nevertheless, your pundits and punters have taken a significant preoccupation with whether 2019 will contain a global recession. The signs are there, at least in some intuitive way. A google trends search on the term recession has spiked to its highest point 5 years, for one. Bond markets are still flashing amber signals: the yield curve is inverting, and US break evens are predicting lower inflation. Equities are still moving into correction mode, demonstrating early signs of a possible bear market. Credit spreads are trending wider, especially in junk bonds, as traders fret about the US corporate debt load. And commodities prices are falling overall, with even oil still suffering, on the belief that we are entering a period of lower global demand.

    Economic data: Concerns about future global economic growth tightened its grip on market participants last week. A slew of fundamental data was released across numerous geographies on Friday, and most of it was quite underwhelming. European PMIs undershot expectations, probably attributable in a big way to the impact of being caught in the middle of several domestic political crises and the US-China trade war. US Retail Sales data printed very slightly above expectations, to the relief of many, showing that the almighty US consumer is holding up well – at least for the time being. But it was a very soft set of Chinese numbers that had the pessimists tattling: the spate of economic indicators released out of China on Friday afternoon proved once more it’s an economy that is slowing down – and hardly in a negligible way.
    Recession chatter: Market commentary is continually focused on what prospect exists of a looming US recession. Financial markets, as distorted as they have become, do not necessarily possess strong predictive power of economic slow-downs. Nevertheless, your pundits and punters have taken a significant preoccupation with whether 2019 will contain a global recession. The signs are there, at least in some intuitive way. A google trends search on the term recession has spiked to its highest point 5 years, for one. Bond markets are still flashing amber signals: the yield curve is inverting, and US break evens are predicting lower inflation. Equities are still moving into correction mode, demonstrating early signs of a possible bear market. Credit spreads are trending wider, especially in junk bonds, as traders fret about the US corporate debt load. And commodities prices are falling overall, with even oil still suffering, on the belief that we are entering a period of lower global demand.

    ASX in the day ahead: There are signs a general risk aversion is clouding the ASX to begin the week. SPI futures are pricing a 32-point drop for the Australian market this morning, which if realized will take ASX200 index through last Tuesday’s closing price at 5576. There has been the tendency for the market to overshoot what’s been implied on the futures contract of late, as fear and volatility galvanizes the sellers in the market. This being so, a new test of last week’s low of 5549 could emerge today, opening-up the possibility for the market to register a fresh two-year low. On balance, the day ahead looks as though it may belong to the bears, with perhaps the best way to judge the session’s trade by assessing the conviction behind the selling. Although it appears the less likely outcome, a bounce today and hold above 5600 would signify demonstrable resilience in the market.

     
     
  24. MaxIG
    Written by Kyle Rodda - IG Australia
    Inverted Yield Curves: There’ll probably be a lot of talk about “inverted yield curves” and “recessions” today. For some, reading such headlines will come as a shock. Perhaps even a cause of anxiety. It’s wise to understand why such commentary has emerged – and what that may imply. The price action in US Treasuries has been quite dramatic in the past 24-hours: the (what ought to be) familiar themes regarding a looming global economic slow-down, and the prospect of softer future US inflation has seen traders cut their predictions of future rates hikes from the US Fed. The short-end of the yield curve – the end which is more exposed to the near-term actions of the Fed – has held up well; but it’s the middle-to-end of the curve – the part controlled very much by traders’ expectations about future growth and inflation – that is experiencing the greatest duress.

    What it all means: In short: traders are anticipating an imminent end to the Fed’s hiking cycle, and they are now trying to approximate when the Fed may cut rates again.  This is where the talk of recession starts to pop-up. As is easy enough to grasp, the Fed would need to cut rates in the event that the economy requires stimulatory support from monetary policy. Such circumstances would emerge if the economy began to slip into something resembling a recession. Hence, when yields at some point in the curve invert, it’s a reflection of traders collectively estimating that in the near-enough future, interest rates will be lower than what they are (around about) now, because the economy will enter into a period of significant weakness to require a rate cut from the Fed.
    No reason to panic (yet): It sounds quite ominous when the mechanics are explained. It’s doubly as bad when one considers the last time the US went into recession, it was the GFC. We all have memories of how dire that stage of history was. However, any fears elicited by talks of recession and everything that comes with it must be moderated by some counterbalancing arguments. Indeed, an inverted yield curve has portended the last 9 out 11 US recessions, but the time-lag between yield-curve-inversion and a recession should be noted. After an inversion of the US 2 Year Treasury note and the 10 Year Treasury note (the spread on these two assets being the most popular barometer for the phenomenon) it’s not for another 12-18 months that a recession is realized.

    US growth is solid (for now): So: while financial markets will be whipped into a frenzy about what is going on – especially as safe-haven assets like US bonds are gobbled-up as risk appetite wanes – the effects on the “real” economy are unlikely to manifest in the all-too immediate future. And justifiably so: global growth is waning, and it is not as synchronized as it was in 2017, but at least in the US, economic indicators remain relatively strong. The labour market, which is in focus this week with Non-Farm Payrolls figures released on Friday, is still very tight, leading to gradual wages growth; quarter-on-quarter GDP is still around 3-and-a-half per cent; and although business conditions are cooling, Monday’s release of US Manufacturing PMI still posted a much better than forecast result.
    What triggered the panic: It begs the question what precipitated this bearishness overnight. In financial markets, an underlying dynamic – such as that which has been experienced in the last 24 hours – may well be present, but it requires a catalyst to ignite it into full motion. Last night’s jitters, in a macro-sense, were brought- about by a slew of disappointing news. The post-G20 rally has been faded, as traders question the longevity and substance behind the so-called deal between the US-China, after several top White House advisers failed to substantiate what outcomes have been agreed upon between the two trade-waring nations. The trade related pessimism was exacerbated by renewed concerns regarding Brexit, and the apparent inevitability of an economically disruptive “hard-Brexit” outcome.
    Risk-off, havens-on: A rush to safety, and a subsequent liquidating of positions in riskier assets, has occurred. Touching again on US Treasuries: the yield on the benchmark 10 Year note has plunged to 2.91 per cent, and on the 2 Year note it has dipped to 2.80 per cent, taking the spread there to a narrow 11 points. Equities have been slaughtered, unwinding a considerable amount of last week’s gains: the Dow Jones is off 2.73 per cent, the S&P500 is off 2.3 per cent, and the NASDAQ is off 3.3 per cent (with an hour remaining in trade). The USD has climbed on its haven appeal, as has the Japanese Yen, which is back into the 112-handle, though gold has also rallied, despite the stronger greenback, to $US1238 per ounce. While in other commodities, copper is down 1.8 per cent, and oil is flat (this, leading into Thursday’s OPEC meeting).
    Australia today: SPI futures are predicting another punishing day for the ASX200, with that contract at time of writing indicating a 52-point fall for the local index. The heavy hitting financials and materials sectors will probably struggle today: the former due to this tumble in bond yields, the latter as traders unwind the growth optimism piqued by the weekend’s G20 meeting. In line with overseas markets, defensive sectors could be the play today, though a day similar to yesterday which saw 10 out of 11 sectors in the red on 17.5 per cent breadth shouldn’t be discounted.
    It’s GDP day today, and that should be watched closely, especially after the RBA at its meeting yesterday talked up the growth prospects of the Australian economy. Whatever the result the numbers produce – forecasts are for annualized growth at 3.3 per cent – it will unlikely shift Australian equities. The interest will be on the Australian Dollar and interest rate markets – the A-Dollar fell below 0.7350 again last night as risk-proxies were dumped – however the likelihood rates traders will bring forward their RBA-hike expectations in from 2020 is rather slim.

  25. MaxIG
    A (shallow) sea of red: There is a lot of red across the board for global equity indices to start the week, but the extent and strength of the downside swings have so far proven quite benign. The theme dominating markets yesterday and overnight was that of slower global growth. It kicked-off more-or-less following the release of some abysmal Chinese trade figures, that added further concern that the Chinese, and therefore global economy is heading for a significant slow-down. The data sparked a generally bearish mood in global markets, prompting a bid-higher in traditional safe-haven assets. At time of writing, the JPY is up along with gold, equities are down, copper is off, commodity-currencies like the A-Dollar has dipped, while bond prices are relatively steady.
    A still quiet day: The VIX index jumped at the start of day’s session but is paring its gains. It remains below the 20 level still – far from its lofty December heights. Concerns about slower global growth is the theme as mentioned, however it’s not rattling trader nerves right now as much as it might have in the recent past. Activity has also been thin. Volumes in every major share market were markedly below average. The swings we have seen in prices too are very modest compared to what one might expect in a market still inhibited (somewhat) by thin holiday liquidity. Global growth is a major headwind, markets are sure of that. However, the behaviour of traders could just as readily be attributed positioning ahead of several weeks of event risk and possible uncertainty.

    Asia pullback: This was especially true in Asia, where Japanese markets were closed for a bank holiday. Looking beyond our local borders for now, Chinese and Hong Kong markets were of primary concern for market participants yesterday. The CSI300 looks like its abandoned its bounce, failing to break through 3100 again. The Hang Seng is trading in a very choppy way and shed 1.38 per cent during trade. Once more: this did occur on rather low volumes. The curious point of price action manifested the USD/CNH, which perhaps owing to the weaker greenback, managed to maintain its rally, to end trade at 6.76. Nevertheless, it was a lacklustre and bearish day in Asian markets, that subsequently flowed into a similar day across Europe.
    Start of reporting season: For US markets, reporting season tops the list of priorities for traders. It commenced today, with the first week of the season dominated by the financials sector. Citigroup was the first cab off the rank and though it posted lower revenues, it's aggressive cost cutting proved enough to lift earnings for the last quarter. It's a supportive signal for macro-watchers, Citigroup's solid result, given the overall downtrend in bank stocks for the better part of 18 months. The sector is considered often a canary in the coal mine for the broader economy. It sets the tone for the other major financial institutions to report this week, which though unlikely to shift overall market sentiment by way of virtue of their results, will provide handy clues about the economic outlook moving forward.

    Light-data, Brexit the event-risk: The sentiment generated from US reporting season and the North American session will probably colour Asian trade again today. The economic calendar is very light-on meaningful data, so traders’ leads, in the absence of surprise events, will be taken from Wall Street's activity. In terms of surprises, whispers coming from Westminster Abby could be a possible cause. The "meaningful vote" on UK Prime Minister May's Brexit-deal will transpire in the next 24-48 hours. Betting markets are overwhelmingly pointing to a failure for the bill to pass through the House of Commons. All the anticipation already has traders jumping at shadows: rumours that the pro-Brexit European Research Group would support Prime Minister May's exit-Bill led to a spike in the Pound, before it retraced its gain when that story proved more fluff than something truly substantial.
    ASX200: Despite Wall Street’s weak-lead, SPI Futures are pointing to a gain of between 5 to 10 points this morning. For the first time in several weeks, the ASX’s trade was dictated by a game of catch-up to news from US markets. It made the session frankly rather dull – although for many surely that was welcomed. There was another challenge and failure of 5800 resistance in the early stages of the session. The bulls quickly gave up the ghost as the broader region’s traders came on line, resulting in a sluggish day for the ASX200. A silver lining for the bulls is that once again, Australian stocks managed to stage a meaningful rally into the close – a sign oftentimes that the “smart” money sees value in the market.
    Support for the ASX: Even still, like Wall Street indices, the market’s recent rally is looking tired. Upside momentum has truly slowed, and the RSI is flattening out at a stable level around 60. Markets tend to test lows to confirm that whatever sell-off preceded its current level is truly over. On that basis, and given that US earnings, growth-data and Brexit are raising the odds of a significant risk-off event in the short-term, the ASX200 may look to test several possible levels to the downside. 5700 will hold psychological significance, before 5630 opens-up as previous support/resistance. This is followed by 5550, at which the market bounced off twice, with the final and most relevant support level at 5410 – a point that represents the make-or-break between a true recovery or further falls.


    Written by Kyle Rodda - IG Australia
     
     

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