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MaxIG

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  1. MaxIG
    A choppy week ends generally flat for Wall Street: Global stocks ended the week on softer footing. But if one narrows their attention to just the S&P500 as the bellwether, the past 5-days culminated in only a 0.76 per cent fall. Trade continues to dominate sentiment on a macro-scale. The US-China trade-war has deteriorated considerably, with positivity in the market currently being sustained by some vague hope that US President Trump and Chinese President Xi will meet on the sidelines of June’s G20 meeting to discuss trade. A total reversal of tariffs between the US and China looks increasingly unlikely however, so markets wait now for the new trade-barriers detrimental consequences to manifest in market fundamentals.
    Risk appetite is waning: Intraday price action on Wall Street somewhat reflected the loosening control buyers have on this market. After a spill at the open, the S&P500 grinded higher throughout trade to turn positive on headlines that the US would be removing steel and aluminium tariffs on Canada and Mexico. It proved to be cold comfort for market participants, however. Volatility edged-up throughout the session, US Treasuries gained very slightly, and the S&P500 shed 0.58 per cent, capping off a day which witnessed a marked flow out of risk-assets, and into safe-haven assets, wherever they could be found.
    Price-action looks ominous for the S&P500: The set up for US stocks is beginning to look quite interesting – and relatively ominous. The general view is that Wall Street equities have remained quite resilient, even somewhat calm, in the face of greater trade-tensions. However, given the possible impacts of slower global trade, maybe this is simply the calm before the storm: the quiet, underground evacuation of smart money from the market, before the herd attempts hastily to catch-up. The S&P500 looks to be taking something of a head-and-shoulders shape after Friday night’s trade, portending that another new-low may be in the making for the market in the short-term.

    How do market participants react to more ScoMo? Turning to the ASX200, and markets with an Australian focus, and despite Friday night’s weak end for European and North American stocks, the ASX200 ought to open 5 points higher today. The interest today, of course, will be on picking up what effect the weekend’s election has on local markets. Financial markets move on surprises: things that weren’t prepared for in advance. Such was the favouritism of the Australian Labor Party to take Saturday’s election, market participants, overall, had positioned their expectations for that party’s victory. As is well known, that outcome has not materialized, so interest turns to how market-pricing repositions from here.
    Australian Dollar gaps higher this morning: Looking at the Australian Dollar as the first cab off the rank, it has gapped higher this morning, to have climbed by as much as 1 per cent, in early trade. While ostensibly a tacit endorsement of the Coalition and their economic agenda, the trading dynamic is probably more a reflection of a “buy-the-rumour-sell-the-fact” situation. That is: one small unknown is removed from the market, and price has adjusted to reflect this, in something of a knee-**** reaction. The phenomenon, therefore, would probably have been observed even in the event of a Labour Party victory, and is probably not representative of a shift in fundamentals.
    ASX200 to begin week on shaky footing: Watching Aussie bonds and rate markets today will be a better barometer for how markets view the economy as-a-result of the Coalition’s election victory. However, given the big issues driving the macro-economy currently, most of which originate from beyond Australia’s shores, the ultimate consequence will be probably be tantamount to short-term noise. Given the lift in the Australian Dollar, and dwindling global-market confidence, the ASX200 may find itself stifled at the outset of this week’s trade – especially after a hot day’s action on Friday, which saw roaring iron ore prices ignite buying activity in mining stocks, and temporarily drove the ASX200 to new 11-year highs.
    All interest in the reaction of bank shares: The key to today’s trade will probably rest on the banks. As a sector, the financials arguably have most to gain from a Coalition government, given that policies like capital gains tax reform, negative-gearing reform, and (to a lesser extent) changes to dividend imputation will no longer be forthcoming. Rightly or wrongly, the banks had suffered from the expected implementation of these policies. To illustrate: the financial sector’s 12-month high came a day before last year’s Coalition leadership coup, after which market participants generally shied from buying banks on the expectation (at the time) that that event had handed government to the Labor Party .

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

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

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

  3. MaxIG
    Written by Kyle Rodda - IG Australia
    A pull-back amid interesting activity: Markets received their slingshot higher and continue to swing about in both directions. That’s the key takeaway from last night’s trade; of course, that’s all too general, though – akin to explaining a rally in the market to their being more buyers-than-sellers. Yes, it’s self-evidently true, however it does little to answer the question of “why?”. Overall, market activity in the last 24-hours has provided a much greater and more nuance picture than what we got from the one-way rally in US markets on Boxing Day. There are now burgeoning answers to some of the questions traders have been asking; like any complex phenomenon though, the answers only lead to more questions. As a trader, this is daunting, but reason for excitement: risk is everywhere, so volatility is higher – but opportunities abound.

    The real versus paper economy: It could be a far too grand a notion: the push and pull in financial markets at present is being driven by confusion regarding the current relationship between the “paper (or financial) economy”, and the “real economy”. The fact that such a distinction exists feels absurd. Shouldn’t proper functioning financial markets be the vessel to allocate capital efficiently throughout a (“real”) economy? In principle, that ought to be so. In this world, that axiom seems far from true. The battle being waged within markets at present – and this unfolded in a significant way overnight – is between economic policy makers (a la the US Federal Reserve) on one hand, and financial market participants on the other: the former says things are alright, while the latter is indicating everywhere that things are not okay.
    End of the cycle? It’s an obscure and distorted world, when it comes to the global economy and how it interacts with financial markets. It’s not necessarily the prevailing view, nor is it absolutely the truth, but times like these when there is such utter confusion in the financial world, it lends itself to the idea that markets have become dislocated from the economies they supposedly serve. Financial cycles (the concept goes) aren’t being driven by economic fundamentals. Instead, they are fuelled via credit cycles that drag real economic growth along with asset bubbles. (Ray Dalio recently discussed the matter in an article certainly worth “Googling”). In such a world, economic relations don’t dictate financial market behaviour, but the other way around – and, unfortunately, as an aside: to the benefit of a very few.
    The Fed’s part to play: Who to blame for that? It’s systemic, and structural and probably founded on some false-ideology. One big part of this system of thought however goes back to this “paper economy” and “real economy” binary. Analysing the rise of the term “real economy” and its usage over time, a spike in the phrase occurred around the early-1980s, around about the time the neo-liberal revolution and subsequent global financialization process began. Since then, policy makers (again, a la the US Federal Reserve) have rationalized away the emergence of massive, credit fuelled asset bubbles, seemingly exacerbating the already unstable underpinnings of the boom-and-bust cycle. That is: the booms and busts have become bigger as the response to each necessitates even more aggressive policy (i.e. monetary policy intervention) to keep the process going.


    Risk-off, anti-growth: This is all very abstract, to be sure. However, it is relevant in the context of last night and today’s trade because of the price action we’ve been handed. First-off, of course, the sell-off on Wall Street continued after the day prior’s historic rally. In saying this, the major Wall Street indices have rallied into the close, on lifted volumes, to add weight to the notion US equities have met their bottom. The real fascination ought to be directed to what has again happened in interest rate and bond markets overnight. Rates and yields have tumbled once more: interest rate traders have reduced their expectations of hikes from the US Fed to a measly 5 points in 2019 (at time of writing), while the yield on the US 2 and 10 Year notes has fallen by 4 basis points each.
    Soft US data: It reeks of the trouble markets find themselves in. The pull back in stocks had been on the cards all day, with US futures pricing that in throughout mixed Asian and European trade. The major driver of sentiment overnight though was the US consumer confidence print, which revealed consumer sentiment plunged last month. It piques concerns that the engine of the US economy – the almighty consumer – is sensing tough times ahead. Forget that the labour market is strong, and consumption has been hitherto solid, the everyday US punter thinks next year will provide them with less than what they have received in the recent past. It’s given the perma-bears the vindication they sought, who’ve once again wagged their finger at the Fed for being so naïve as to think the US economy could prosper without accommodative monetary policy.
    Australia macro and day ahead: Fortunately for Australian markets, we’ve not been forced to deal with such a struggle between markets and policy makers. We’ve yet to resort to extreme monetary policy measures to support our economy, and we’ve a simpler economic structure: at its core, if global (read: Chinese) growth prospers, so do we. There are risks there that may mean our economy will face headwinds in 2019, mostly in the form of the trade war. Tighter financial conditions will filter through to our markets, as well. Given the weightiness of the banks and miners in the ASX200, these variables pose reasonable downside risk for our market next year.
    So: today will be risk-off, in line with the lead passed to us from bearish traders in Europe and North America. Hence, SPI futures are indicating a 73-point drop at the open for the ASX200, on the back of a volume-light, but broad-based 1.88 per cent rally on the index yesterday. The market closed just below the significant 5600 level during yesterday’s trade – above which a cluster of resistance levels exists up towards 5630. The anti-risk, anti-growth feel to overnight trade has also harmed the Australian Dollar, which despite a sell-off in the USD, is testing support at around 0.7020, and eyes a break below the key psychological barrier at 0.7000.

  4. MaxIG
    A game of chicken: Did Powell just blink? That’s how last night’s speech from the Fed chair is being interpreted. Debate has raged whether in the face of financial market turmoil, the Fed will be forced to cool its rate-hike rhetoric. Powell’s speech – and this is speculative – may have represented this. Gone was the talk of rates being “a long way” from neutral, and that rates may need to move “past (the) neutral” rate. Instead, it was replaced with the key comment interest rates are “just below” the neutral range, and that future rate hikes, as Fed Vice President Richard Clarida implored yesterday, will be “data dependant”. Perhaps we saw last night, in the tradition of many-a Fed Chair gone before, the latest incarnation of a “Fed-put” – that is, this time around, a “Powell-put”, which will underwrite financial market strength at the first sign of true-trouble.
    Rates and bonds: The reactions in financial markets have been predictable, but assertive. US Fed fund futures suggest that traders have heard enough to justify pricing in an 80 per cent chance of a Fed-hike next month. But naturally, the shifting of expectations has been seen in the pricing for rate hikes in 2019. The Fed’s last dot-plots implied 3 hikes for next year – and markets got close to pricing the full three at stages only just over a month ago. We are now seeing just the one, and for some very dovish folk, even that’s too bullish. The short end of the US Treasury curve is manifesting the shift in sentiment: the benchmark 10 Year Treasury note is yielding 3.05 per cent currently, but the yield on interest rate sensitive 2 Year note has fallen back to 2.80 per cent, taking the spread between those two assets back to 25 basis points.
    Currencies: The US Dollar has been ubiquitously dumped by extension of the fall in rate expectations and yields on US Dollar denominated assets. Even despite no sort of counterbalancing good news to prop-up any of the other major world-currencies, the effect of the weaker green back has been spread evenly across the G10 heat-map. The GBP and EUR, which are in as vulnerable a place as ever due to ongoing Brexit drama, are up to the 1.2840 and 1.1380 levels, respectively. The traditionally risk-off Japanese Yen has appreciated slightly, as did gold, which is trading at $US1228 per ounce, and the embattled Chinese Yuan climbed to fetch 6.93. While the highly liquid risk-proxies, the New Zealand Dollar and Australian Dollar, have spiked to 0.7320 and 0.6880, respectively.

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

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

     
  5. MaxIG
    Written by Kyle Rodda - IG Australia
    More information, greater confidence: Markets have been awash with data over the last 24 hours – and traders love it. It’s a behavioural quirk in financial markets: whether good, bad, or otherwise, an inundation of information paints a full and colourful picture of the world and satisfies that innate human desire for (an illusion) of control and certainty. The phenomenon echoes lessons that were reinforced upon the world all the way back in 2008 by one of that years’ seminal cultural events. No, not the zenith of the Global Financial Crisis, but Christopher Nolan’s The Dark Knight and Heath Ledger’s inimitable portrayal of The Joker. In a scene that epitomizes the philosophy of the uber-anarchist Joker, the character ruminates during a monologue: “Nobody panics when things go according to plan. Even when the plan is horrifying… nobody panics. Because it’s all part of the plan.”
    Fundamentals unchanged: Why bring this up? Outside taking pause to remember a time before the ills of the GFC ailed the global economy, it sums-up quite well the attitude of market participants in times of turmoil. Yesterday saw the release of a swathe of economic and financial data, which assessed on balance, delivered unremarkable and mixed results. None of it fundamentally changed the outlook for the financial world, but the fact that it filled in some blanks and confirmed a few existing biases meant that everything, overall was judged to be ok. Herein lies the problem for now: the issues that ignited October’s sell-off have yet to disappear, meaning that markets remain just as liable to the extreme bouts of panic and volatility that last month delivered us.
    Adjustments still underway: The biggest problem here is that when assessing the balance of buyers and sellers, and their overall behaviour, not much has changed. The market was led higher yesterday by a drive into tech-stocks and other growth/momentum sectors – apparently based on a so-so earnings update from Facebook, and an anticipation for upcoming Apple results. If there is one thing that can be taken away from the market commentary in the last 2 weeks, the financial market pros out there – the big money managers, the institutional players, the stock brokers, and the like – believe it’s time to shift away from growth investing into value investing. Assuming they are to be trusted, the players controlling the ultimate fortunes of the market are shifting funds away from areas that have propped markets up this week.
    Same behaviour driving week’s recovery: Thus: here comes the fissure at the centre of it all: if traders are still chasing momentum flow in growth sectors, and the fundamental outlook for broader financial markets hasn’t changed yet, then October’s shake-out probably has further to run. Now, several factors will surely insulate punters from such extreme bouts of volatility. Oft-cited share buy backs will kick-off in a significant way now, plus seasonality suggests markets are entering a fruitful time of year. Moreover, earnings are still strong even if the medium-term outlook has changed, and economic growth (in the US, but to a lesser extent other geographies) is powering along. However, these factors paper over the cracks – and the truly structural factors – which means while financial calamity isn’t expected any time soon, greater adjustments (that is: more corrective action) in financial markets may well loom.

    Risk one: higher rates: The two biggest factors remain the prospect of higher global interest rates, and the possibility that markets have already reached peak growth. Regarding the former, it is conspicuous and questionable that traders have reduced their bets of a rate hike from the US Federal Reserve in December and lowered their expectations of the number of hikes in 2019. It appears a classic conflation by market participants that weakness on Wall Street necessitates weakness on main street.
    Though fortunes can quickly change, economic data continues to affirm that the US economy is in a strong position and price pressures are building – which will require a firmer hand and tighter policy from the US Federal reserve. US bond yields have fallen, and the USD has rallied of late, inviting investors back into equity markets. Last night’s trading session saw bond yields tick higher again, implying that the risks of rising rates haven’t been fully discounted, and sustained volatility on this basis persists.

    Risk two: slower growth: Secondary to tightening global monetary conditions, the other factor that precipitated October’s market rout remains – and was, in fact, reinforced yesterday. The prospect of weaker growth ex-US economy, due to the trade-war as much as any other cyclical causes, looms large on the horizon. Chinese PMI data yesterday undershot forecasts once more, with the Manufacturing component to that release inching closer to a sub-50 “contractionary” print, pushing the off-shore Yuan ever closer to 7.00; while the BOJ during its meeting yesterday downgraded it growth and inflation forecasts.
    The fears across Asia added to the nervousness catalysed by this week’s soft European growth numbers – although it must be said that the perception of European growth did receive a boost last night when it was reported that a Brexit deal may arrive as soon as November 21. Nevertheless, if the market correction October was in a big way foundered upon shakier global growth prospects, little revealed this week so far should be interpreted as diminishing that risk in the short-term.
    Today for the ASX200: SPI futures are indicating that, to start the new month, the ASX200 will participate in the relief rally sweeping markets and add 26 points at the open. Despite sluggishness throughout the day, the Australian market jumped just before the end of yesterday's session, courtesy of a buy-up in bank stocks following ANZ's better than expected results. A full turn around isn't yet underway for the ASX200, but the seeds are there to potentially break the corrective pattern hobbling the index -- with a break and hold above 5930 a definitive sign of this. Just like the rest of global equities, the risks and challenges remain, but yesterday's weak CPI print at least affirms that RBA policy will probably remain supportive of asset markets. The next two days of trade will be significant for the Australian market's nascent recovery, as NAB reports today, and macro watchers eye local retail sales figures tomorrow, and the more significant US Non-Farm Payrolls release on Friday night.
     
  6. MaxIG
    Written by Kyle Rodda - IG Australia
    A relief rally, now onto the next risk: The relief rally for market-bulls was sweet, but fleeting: it’s on to the next risk event now. Traders are being inundated by information, much of it speculative. Against this backdrop, volatility reigns: while off its highs still, the VIX is up 2.7 per cent on the day. To be clear, the Fed’s dovishness and Mr. Powell’s-famous-Put is underwriting the potential for future bullishness. But market participants can’t afford to let their guard down in this environment. We have the world’s most powerful politicians converging on Argentina, and with so many fissures running-through global political economy, the number of issues threatening market stability is considerable. One assumes that every generation thinks of themselves as existing at the end of history – reference: we can thank Fukuyama for that notion, perhaps – but it does sometimes feel that with the world-order trembling, we are living through a historical juncture of some description.
    Markets want what’s familiar: Markets don’t like this. They desire support and stability and a protection of the status quo. It’s why, in part, seeing the Fed ostensibly step in to support financial markets is so emboldening, and sparks all sorts of bullish impulses. This is especially so within equity markets, which being able to gorge on cheap credit for years, became spoilt and fattened. The fundamentals of the system itself are shaky. Although this ought to be an inherent virtue when it comes to the nature of capitalism – the notion of creative destruction, as economist Joseph Schumpeter expressed it, whereby viable investments prosper, and wasteful inefficiencies are purged –  for the better part of a decade, policy makers (rightly or wrongly) have sought to resist this process to maintain a semblance of economic constancy and social confidence.
    Withdrawal symptoms: The problem is weening the macroeconomy and financial markets off the opiate. This is what the Fed is ultimately attempting to do, but with capital having allocated itself to places it ought not to have, removing the support from the system, along with the perverse incentives it produced, is proving no simple task. The Fed yesterday morning – articulated in Powell’s speech –  almost certainly backed down in the face of the implicit pressure applied by markets. The message was clear from marker participants: we don’t like the risks of macroeconomic and geopolitical instability, we think growth will slow, we need support, otherwise we’ll melt-down. And so, in the tradition of Fed board’s gone by, Powell did. The message was only affirmed in this morning’s FOMC Minutes: the idea of “further hikes” passed December is debatable, because economic forecasts are softer, and there exists too many risks that could undermine the Fed’s objectives.

    Inflation waning? One of these objectives, when looking at the Fed’s strict mandate, is inflation targeting, and it appears that fundamental inflation is petering out once again. Market participants have cooled on the idea of that inflation risk is high, primarily due to a downgrade in growth forecasts and the recent dumping in oil prices. The Fed’s chosen inflation measure, the PCE Index, printed overnight, and revealed inflation slipped below the Fed’s target level of 2 per cent by more than forecast. The number came in at 1.8%. It’s not to say the risk of inflation has disappeared: wages growth is on the up in the US, which could conceivably feed into higher prices – not to mention the effect tariffs or (an unlikely) turnaround in oil prices could have on future inflation. However, as the markets understand things for now, inflation isn’t a bug bear, and that gives an assurance that the Fed will stay steady.
    The G20: In the bigger picture: it’s about this weekend’s G20 Summit. The trade war, Brexit, oil prices and global economic prospects are the big talking points; but underneath those we also have new tensions between Russia and the Ukraine, Italy and its fiscal situation, the Saudi’s and the controversy surrounding the Khashoggi murder, along with a myriad of regional issues faced around the globe. It’s a true tinderbox, that unsurprisingly would have world leaders, and thus market participants, very anxious. The core dynamic appears to be that those with the power to influence the direction of the political-economic world order have no interest in preserving it. Trump’s America is descending into paranoid isolationism, China wishes to reshape the neoliberal system to serve its long term national interest, the Russians are apparently trying to consolidate their regional interests, while the Europeans are busy naval gazing and questioning how to keep a unified Europe together at all.
    Trade War: Presumably, traders will do their best to ignore the structural power struggles and all the comparatively smaller issues dampening market sentiment and just focus on what will come out of the Trump-Xi dinner date. One would have to be utterly naïve to believe a breakthrough is upon us here. It’s unimaginable – granted, maybe only for those who lack a rich enough imagination – that either side will compromise its strategic interests. President Trump will want concessions from the Chinese before doing a “deal”, the likelihood of which seems very low. China possesses a long-term strategy for its nation and economy – one that extends passed the speedbump that is the Trump Presidency. Compromising the future to appease a bombastic American populist leader in the present is counterproductive. Both sides must know this, and that they are not on the same page right now, whatever the benefits may be. The likely outcome from the weekend will surely be a piecemeal statement committing to ongoing talks, as always seems to emerge from the talk-fests.
    Price activity overnight: The price action overnight reflecting the underlying market dynamic described so far has been quite subdued. European indices caught up with their North American and (some) Asian counterparts to put in its own post-Powell relief rally. US equities lost steam however, but in late trade look poised to close 0.3 per cent higher for the day. US Treasuries whipsawed on shifting sentiment relating to interest rates, with the yield on the 2 Year Note is currently at 2.81 per cent and the yield on the 10 Year note is 3.03 per cent. In currencies, the US Dollar is effectively flat, the EUR is slightly higher, the Yen has experienced a haven bid along with Gold, the Pound fell on Brexit fears, and the risk off tone sent the A-Dollar below 0.7300. Finally, commodities are slightly up: oil benefitted from news that Russia was prepared to cooperate with Saudi Arabia on production cuts, but copper is slightly lower.

    ASX today: Promisingly for Australian equity market bulls, SPI futures are indicating a 12-point jump at the open for the ASX200, in line with the late run on Wall Street. The ASX experienced an immediate pop-higher at yesterday’s open, but the price action was dull and middling throughout the day. Overall, volume was strong, breadth was healthy, and the large-cap heavy weights in the materials and financials sectors added 13 and 10 points to the index, respectively. Growth stocks were big higher as expected, while defensive sectors were somewhat ignored. Private Capex figures were released and didn’t rock markets too much: it came in below expectations, but there were signs non-mining investment is turning around. The day ahead from a technical perspective should be assessed on whether the ASX200 can clear the small resistance hurdle at 5780 or so. But given what’s on for the weekend though, one shouldn’t be surprised or disheartened if that doesn’t happen today.
  7. MaxIG
    Written by Kyle Rodda - IG Australia
    Risk? No, thanks: Markets have given a resounding “nope” to all varieties of risk overnight. Equities have been slogged on Wall Street, following to a sluggish day in European markets, that saw the FTSE drop 0.2 per cent and the DAX shed 0.85 per cent. Here it looks like this is the convergence punters have been calling: US shares are playing a rapid catch-up with their global counterparts. The losses are piling up. The NASDAQ has been hit the worst in the North American session led by falls in FANG stocks. At time of writing, with about half an hour left in the session, the losses for that index are hovering around 3.00 per cent. That’s not to say the picture is any prettier for the other major US indices: The S&P500 is down just-shy of 2 per cent, and the Dow Jones is much the same.
    The havens: Typically, US Treasuries have maintained their bid. The yield on US 10 Year Treasuries has dipped to 3.05 per cent, while the yield on US 2 Year note has fallen further, down 3 points to 2.77 per cent. The markets are scrambling for safety once more as volatility spikes again: the VIX is up to about 21, and that is ample reason for investors to bail-out of equities. The US Dollar is suffering from the drop-in yields, and the Japanese Yen is accepting the safe-haven bid, along with the EUR, which is eyeing off 115 again, supported by (slightly) diminished anxiety around the Italian fiscal crisis. Of course, the Australian Dollar and New Zealand have pulled back, trading at 0.7290 and 0.6840, respectively, although it must be mentioned that commodity prices are holding well enough.
    Risk factors: The US Dollar Index is threatening to break short-term trend line support, and this is clearly helping gold prices: in another example of a flight to safety, the price of the yellow metal has climbed to $US1224 per ounce. Calling a top for the greenback is way too rash, and in time if this level of volatility continues, a return to the almighty Dollar would surely manifest. What is happening here, for now, though, is traders are pricing in a more dovish Fed, against what is being presumed as the start of “slower global growth” narrative leading into 2019. The hostilities between the US and China flowing from the weekend’s APEC summit fanned these fears, as has the deteriorating situation around Brexit. But ultimately, they tie back to the belief that the Fed may have overcooked their tightening regime.

    It’s the Fed, stupid! Markets have reduced their bets the Fed will hike rates next month to 65 per cent, with only a further two priced in for 2019. This is well-off the number flagged by the Fed in their dot plots, which outlines a further 5 hikes by 2020. The divergence between policy makers forecasts and that of market participants opens-up a cavernous divide, and subsequently boosts the chances of high future volatility. Growth aside, inflation risk still exists. Although there are few major signs (for now) that inflation could spiral out of control, building wage pressures, higher prices from tariffs, and the knock-on effects of Trump’s fiscal assertiveness mean that the risk remains non-negligible. If inflation were to emerge, the Fed would have no choice but to react and hike rates, sending markets scrambling to re-price expectations.
    Corporate debt bomb? It's on the chance that this situation will occur that has traders most worried, especially given the hot issue in global markets, presently: the massive US corporate debt burden and the impact tighter financial conditions will have on it. Credit spreads have continued to widen since October’s major share market correction: in fact, on both investment grade debt and junk bonds, the widening has accelerated. The dynamic makes it truly difficult to sustain equity markets gains, as attention becomes fixated on credit risk, and the broader implications of a more expensive debt burden for corporates, as a climb in short term rates translates into higher future refinancing costs. Indeed, it remains early days on this matter, but if it were spiral out of control – in a worst-case scenario – the selling across global equity markets witnessed already would only be the beginning.

    Pain for the Asian equities: It must be said this is one of the more catastrophic scenarios, and it is a long way from assured that it will play-out.  Nevertheless, as it stands one day into the trading week, equities are having trouble finding friends. The volatility in US markets has futures pricing-in a generally negative day for Asian equity markets, on the back of day that – granting thinner volume everywhere bar Chinese markets – wasn’t too bad. The ASX200 certainly suffered, but the Nikkei was able to add 0.65%, the Hang Seng 0.72 per cent, and the CSI300 1.13 per cent.  There was very little news flow for the region yesterday, aside from the overhang of the disappointment from the APEC summit, and perhaps the absence of information supported those gains.
    Australia today: It will be another day with a dearth of scheduled economic data, with RBA Minutes this morning the highlight. SPI futures are pointing to a 9-point drop at the open for the ASX200. It was another matter of yesterday’s sell-off simply being an “equity problem”: few sectors were spared from the selling, as investors, trading within thinner volumes, unwound their exposure to equities. The story for the day – and this was represented in trading volumes – was the latest chapter in the Financial Services Royal Commission. The financials sector sucked 15 points from the index on volumes 15% per cent above average. The close for the ASX200 below the psychological-level of 5700 opens-up downside for the ASX200 in the days ahead to key support around 5625, with momentum indicators and the RSI suggesting such declines are more than feasible.

  8. MaxIG
    Risk-assets up, but trade was tepid: The overnight session was, on balance, positive for risk assets, though the conviction behind market-moves was missing. The S&P500 – the natural barometer for market-mood currently – experienced a middling day. It’s closed more-or-less flat, having made a failed foray higher throughout Wall Street trade, to have sold off right-below crucial resistance at 2800. For the bulls in the market, circumstances didn’t fundamentally change last night. The short-term trend is pointing to the downside, with momentum clearly holding in that direction, too. The 200-day moving average is acting as a magnet for the index now, seemingly keeping the market neutralized until the next market-moving catalyst. 

    News-flow thin, ahead of a busy week next week: And at that, this week has very much been characterized by that general theme: for all the risks, and generally bad news, in the world, a thin data week has deprived market participants of fresh-trading fodder. There has been high impact news and events, it must be said. But much of it doesn’t relate to the news that markets are watching for to either driver the present trend further, or inspire something of a trend-reversal. A lot of that is due to the time of the month, but even still, given the heightened tensions in markets, one might have expected a little more substantial news-flow.
    Fears building still in the market: Indeed, there are trade-war headlines floating around the traps, and of course it’s that subject that’s responsible for equity markets’ global pullback. However, for better or worse, US President Trump – the man whose words (or Tweets) matter most – has been conspicuously quiet about trade this week. So as-a-result, the prevailing trend of the last 3 weeks has continued unabated. Market participants are betting on a global economic slowdown, and feel little inclined to take risks. Stocks are selling-off accordingly, while bonds are going on a tear, as traders position for a deterioration in global growth conditions, and a subsequent need for central bankers to cut interest-rates.
    The counterbalancing factors: This general assessment of the state-of-play ought not to be considered catastrophic – at a minimum: not yet. There are reasons to be somewhat upbeat: earnings on Wall Street haven’t been revised aggressively lower in response to the perceived threat of the US-China trade war. Furthermore, the sell-off in global equities might just as much be due to a reversal in momentum chasing, after a time when stocks markets got bid very high. And at that, volatility could be chalked-up to uncertainty rather than a tangible change in fundamentals. No doubt, the chance that things could get worse from here is elevated, but not a certainty.
    Markets betting on rate cuts: There is also reason to believe global policymakers will cushion the blow of any material economic slowdown. And probably, this variable is where things could really shift. Markets are pricing that indeed the Fed, as well as many other global central banks, like the RBA, will cut interest rates aggressively in response to slower growth. The view point has certainly kept stock valuations attractive, and given hope to market-bulls that the global economy could perform a soft landing. This isn’t manifesting in price action now, but if earnings growth remains positive, lower rate expectations will keep underpinning equity market strength.
    Might the Fed save the day? And last night, optimism was massaged slightly that the Fed may be willing to support this attitude. US Fed Vice-Chair delivered a speech, in which he affirmed the bank’s view that the economy is in “a very good place”, but that the Fed is on standby to consider downside economic risks. That message, though moderate in its delivery, does mark a creeping dovishness in “Fed-speak”, which has thus far been absent throughout this market slow down. It can’t save the day forever, but for markets in the short term, knowing the Fed is on standby is a soothing notion.

    ASX to open higher, with China data in focus: The culmination of last trade’s trade will see the ASX200, according to SPI Futures, open 20 points higher this morning. It will only be a modest recovery, following a day where the market shed 47 points, on the back of some broad-based, trade-war fear related panic-selling. The ASX will be quite attuned, indirectly, to the trade-war narrative today. The major data release in the Asian session will be Chinese Manufacturing PMI data. What goes for the Chinese economy, goes for Australia’s. If the trade-war is seen to be weighing on Chinese manufacturing activity, expect fears to be ratcheted up about a worse-than-expect global economic slow-down.

    Written by Kyle Rodda - IG Australia
  9. 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.

  10. MaxIG
    Written by Kyle Rodda - IG Australia
    Sentiment cooling: Sentiment is cooling and the drivers that have sustained global equity's recovery are subsiding. It's no cause for alarm (yet) by any means. The markets are demonstrating a level of short-term exhaustion after its chaotic December. The same risks remain; traders have just shifted their views. The concerns regarding a slow-down in global growth have abated somewhat, though the issue is still simmering. The outlook for how the Fed will approach policy is being judged as more-dovish, however it remains an ambiguous matter. The US and China appear to be pushing for a trade-deal, but it's known that it will be a protracted process to arrive at one. The US government shut down is down the list of worries for markets for now, although it is gradually gaining greater significance.
    ASX200’s crossroads: SPI futures are currently indicating a modest jump of 5 points for the ASX200 at the open. The conviction for Aussie-market Bulls will be tested today. The ASX200 stands before a reasonably significant wall, that if climbed, goes some way to validate that it's recent rally is more than a counter-trend. The zone between 5780 and 5800 has proven a marshy resistance area in the last two-days. The Bulls have done well to push the market through prevailing downward trend-line resistance, but now a meaningful push through 5800 is required to confirm the move higher. After a lukewarm day, the ASX managed to close at 5797, courtesy of a somewhat inexplicable 0.3 per cent jump in the index's price in the post-market auction.

    Australian Retail Sales: The macro-news for Australian markets has been relatively dull lately. Local shares, along with other assets, have traded very much in sympathy with developments on Wall Street. For justified reasoning too: sentiment to begin 2019 has been dictated by renewed optimism relating to the trade-war – a conflict that impacts the Australian economic outlook more than most. Overall, that will remain so given critical juncture US stocks are at. However today, Australian traders get their first real-dose of economic data: local retail sales figures for the month of November. The print is expected to reveal that sales expanded by 0.3 per cent month-on-month – a figure that is expected to be underpinned by strong Black Friday activity that month.
    Australian interest rates: Following the weaker December GDP figures, and against the backdrop of high private debt levels and falling house prices, analysts have generally expressed the concern that households are in a difficult spot. Given consumption contributes just over 50 per cent of total GDP, the perceived economic headwinds for consumers is driving markets to price in some-degree of an economic slow-down in 2019. On current pricing, interest rate markets have an implied probability of about 30 per cent that the RBA will cut rates before December this year. Today's retail sales figures will offer one of the first glimpses into what state the Australian consumer is in, with rates markets, and the AUD, sure to shift in the event of an upside or downside surprise.

    Global-macro: Of course, given Australia's status as an export driven economy, subject to the whims of the globe's economic (mis)fortunes, the broader macro-backdrop is crucial. Several data releases rattled market's nerves in the last 24 hours. Chinese CPI and PPI figures missed forecasts by some way, indicating softening demand within China's domestic economy; and ECB Monetary policy minutes all but confirmed the continent is heading for a slowdown in economic activity. Stock indices were unmoved on the news; however, a level of risk aversion was observable within markets. US Treasuries caught a small-bid and the US Dollar climbed on a pullback in the Euro. While a rotation into non-cyclical stocks, took place in Europe and to a less extent the US, as growth appetite diminished.
    Powell speaks again: Once again, the night's biggest release came out of the US and related to the US Federal Reserve. Fed-Chair Jerome Powell delivered a speech, and in all, while received in a better way than some of Powell's other addresses, markets didn't like the tone. There was a lot of emphasis on the unwinding of the Fed's balance sheet, and how that endeavour may progress in the year ahead. He also seemed to go to pains to emphasise how flexible and patient the Fed would be. Although it hasn't derailed US stocks so-far today, traders didn't hear enough of what they wanted to turn overly bullish on the market. With an hour left in play, the S&P500 is hovering between slight gains and slight losses for the day.

    Trump dumps Davos; CPI data tonight: To be fair on Mr. Powell, his speech did coincide with a Tweet from US President Trump announcing that he would be abandoning the economic summit in Davos to deal with the US Government shut-down. Markets didn't like that either: it was expected President Trump would further trade-talks with Chinese President Xi Jinping at the summit. Nevertheless, if US stocks were to close right now, the activity in the market would add-weight to the notion the recent rally is more bounce than recovery. The jury is still out, but momentum is slowing and at about 2600, the market is being faded. US CPI data is released tonight, so that may provide the impetus for even balanced battle between the bulls-and-bears to tip in one direction or the other.
     
  11. MaxIG
    A thus far settled start to the week: It was a day of low activity and mixed results, generally across global markets in the last 24-hours. Equities were patchy in their performance, on much lower than average volumes, while a retracing in bonds revealed stable risk-sentiment. It hasn't been so for some time, but yesterday market participants behaved in a classic "Monday" way. There was a lack of a unifying theme to drive market activity in a macro-sense, leaving traders to trade-off the idiosyncratic stories moving prices region-by-region. Granted, the trade-war negotiations currently going-on in Beijing were of top priority, however the interest in that event extended only as far as speculation by the commentariat. For traders, fresh leads are being awaited, to add some semblance of volatility to the market.
    Traders awaiting tradeable leads: The data docket is stacked to the end of the week, so perhaps it'll be another couple of days of listless trade before global markets really start to reshuffle the deck. Of course, a surprise could ignite some excitement; but naturally that's inherently unpredictable and difficult to position for. Chinese markets returned to the fray yesterday, adding that lost liquidity from markets. Japan was offline instead, creating some choppy trade in the CHF in very early trade. The reintroduction of Chinese markets may well have soothed the bull's concerns temporarily. After a week away, during which plenty of market moving events occurred, Chinese traders felt it fitting to ignore the noise, and jumped back into stocks, to deliver a 1.82 per cent gain for the CSI300 yesterday.
    Iron ore prices rocketing higher: Iron ore prices demonstrated best the impact of the return of Chinese demand to markets. Having continued to climb despite the absence of Chinese traders, and in light of further concerns about future production and supply into commodity markets after the tragic Vale dam collapse, iron ore burst out of the gates upon the reopening of the Dalian Commodity exchange. So much so, that on the first tick, the active iron ore contract reached its limit-up level, and effectively froze trade in the market. The price in iron ore is looking aggressively overbought in the short-and-medium term and is likely to attract short-sellers; however, there’s no knowing how long worries about iron supply into markets will linger, meaning countering this trend is not for the faint hearted.

    ASX200 held together by strength in materials sector: Australian markets are, as one can easily imagine, benefiting from iron ore’s parabolic rise. Despite an overall lacklustre day in domestic equities, during which breadth was quite balanced and volume was below average, a 16-point gain from the materials sector proved enough to staunch much of the ASX200’s losses. On the back of this, today SPI Futures are indicating a 14-point jump at the open for the index, probably once more courtesy of, in a big way, further falls in Australian Commonwealth Bond yields, and the depreciating Australian Dollar. Price action in the short-to-medium term is showing an ASX200 somewhat in no man’s land: at 6060, and with slowing momentum, the market eyes support at 5950, as it pulls gradually away from 6100/05 resistance.

    Markets keep pricing in weaker Australian growth: The Australian economic growth outlook is still looking clouded. Markets have been leading policy makers on this fact, and after the RBA’s admission last week their growth forecasts aren’t as strong as they once were, traders have taken another leap ahead to price-in weaker growth and inflation, and lower rates for the Australian economy in 2019. The pivotal event to watch will be GDP figures when they are released to gauge the merit of this view; but unfortunately, market participants will need to wait for the start of March to receive that information. The day ahead does contain NAB Business Confidence figures however, which may prove illustrative in a small way how the supply side of the economy views the domestic economy now and into the near future.
    Greenback rallies on weaker European growth outlook: In reference to currency markets, the US Dollar sustained its rally overnight, as the combination of a desire for safe-haven assets and higher yields push-up the greenback. The conspicuous loser out of this dynamic has been the EUR/USD, which has broken below the 1.13 handle once again overnight. Although they climbed yesterday, the trend lower in European bonds yields looks to be manifesting in the shared currency, as traders price in the prospect of a major European slowdown. The flight to the greenback weighed heavily on commodity currencies, too. The Australian Dollar registered an overnight low of 0.7057, pressured by widening yield differentials, with the spread between the very interest rate sensitive 2 Year ACGBs and USTs widening to 82 basis points. 
    The UK experiences its own growth concerns: Still in currency land, and the Pound was one of the worst performing G10 currencies overnight, following the release of a slew of weak economic data during European trade. Most conspicuous was the fall in headline month-on-month GDP, which printed at -0.4 per, driving a miss in the more-impactful quarterly figure of 0.2 per cent – a skerrick below the 0.3 per cent that economists had estimated. Remarkably, even in light of the data-dump, which clearly illustrated the sluggishness of the UK economy, interest rate markets scarcely moved. A likely reflection of (an arguably Panglossian outlook for) Brexit expectations, interest rate traders are still maintaining an implied probability of 33 per cent that the Bank of England will hike interest rates before year end.
    Written by Kyle Rodda - IG Australia

  12. MaxIG
    A shift in perceptions: The fundamentals shifted on Friday. It wasn't a complete "180", but enough to change market sentiment in favour of the Bulls. The highly anticipated monthly Non-Farm Payrolls figure, along with US Federal Reserve Chair Jerome Powell's interview, delivered the goldilocks outcome market participants were craving. For those holding hope for financial markets and the global economy, the information gathered from each event soothed nerves that a major global economic slowdown is upon us. It's too early to make a solid call and form a trend from the circumstances, it must be noted – especially following the poor US ISM Manufacturing data and Apple's revenue downgrade. However, the news was enough to spark bullishness in traders, driving a rally into risk assets and out of safe havens to cap-off last week.
    US Non-Farm Payrolls: The US Non-Farm Payrolls print was blistering, arguably revealing the best set of jobs figures out of the US for 2018. The jobs-added number smashed forecasts, printing at 312k for the month of December, above economist estimates of 179k. Previous month's figures were also revised higher, for a net gain of 58,000 in October and November. The unemployment rate did tick higher to 3.9 per cent from 3.7 per cent, but only on-the-back-of a climb in the participation rate, suggesting spare capacity exists even still in the tight US labour market. And most crucially, wage growth numbers revealed a climb in workers’ pay to 3.2 per cent on an annualised basis -- the best rate of growth roughly since the GFC.
    A dovish Powell: The set of data could have been accused of being too hot, and a potential impetus for a hawkish Fed. The price action pointed to the contrary, perhaps courtesy of US Fed Chair Jerome Powell's interview on Friday night. Markets have been crying-out for attention from the Fed since October, around the time Chair Powell made his “a long way from neutral” comments. For those sympathetic to the view a central bank should be a back-stop for financial market volatility, Powell finally delivered the dovish stance markets had been calling-for. Perhaps taking a few pointers from his predecessors, and interlocutors for the night, Ben Bernanke and Janet Yellen, Powell assured the Fed is “listening carefully” to markets’ concerns and is “prepared with flexible policy”.
    Risk-on: Markets had been pricing in a significant increase in the risk of recession last week, sending Wall Street shares tumbling, consequently. The solid US data and Chairperson Powell’s speech did something to settle these fears, albeit not entirely. In another day of above average activity, Wall Street rallied into the back end of the US session, adding around 3.43 per cent according to the S&P500. While still twisted in an ugly way, the US Treasury Curve flattened out somewhat, as the yield on US 10 Year Treasuries rallied 11 basis points, in response to interest rate markets unwinding bets of a Fed rate-cut in 2019. Gold and the Yen pulled back on diminished haven demand, while emerging markets currencies, and their key proxy the Australian Dollar, went on a tear.
    ASX: SPI Futures are indicating a very solid 69-point jump for the ASX200 this morning, according to that contract’s last traded price. Despite being wedged between the dual global concerns of slower global growth and tighter global financial conditions, the Australian share-market has shown resilience recently. Aside from a temporary tumble on thin liquidity prior to Christmas to new multi-year lows, the ASX200 has more-or-less traded range bound between 5500-5700 for the last month. Our share market hasn’t quite seen the high-octane activity lately that Wall Street has, with volumes below average and swings in price-action only really spurred by sentiment from US markets. There are general signs of consolidation occurring in the index, however a break in either direction, particularly upon the return of normal trading conditions, appears imminent.

    US-China trade talks: The fortunes of the ASX200 on a macro-scale will be dictated first by US markets, then by the outlook for China. The economic calendar presents as quite thin to begin the week, providing traders of riskier assets room to manoeuvre if the newswires remain clear of outside noise. The primary focus for now will be on the mid-level trade talks due to begin between the US and China today. Major breakthroughs are unlikely in the absence of each nation’s heavy hitter, but the communications coming out of this week’s talks will be crucial. Evidence is mounting that the trade-war is starting to bite, exacerbating existing economic challenges for both sides: market participants will be hungry for indications that an urgency amongst policymakers is building now to resolve it.
    The markets’ balancing act: Where markets head from here remains uncertain. Volatility will continue to show-up this week and throughout the rest of January. An easing of fears regarding the state of US economic growth is helpful, but it throws up the paradox: strong growth implies likely tighter monetary policy, which is bad for stocks and riskier assets; weak growth implies the possibility of a recession, which is bad for stocks and riskier assets. There is a middle way, as there often is, between both poles, within which the Fed must traverse. They may well do just that and keep this bull market afloat in doing so. There will be missteps along the way though, meaning (as has often been said) fear and subsequent volatility will spike as market conditions evolve.

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

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

     
    Regional data: Despite leading to limited price action across the region, Asia was littered with fundamental data yesterday. It was kicked-off early morning our time, upon the release of key New Zealand CPI data, which revealed stronger than expected consumer price growth of 1.9 per cent annualized for that economy. The algo-traders seemed to kick-in post the event, pushing the NZD/USD to the significant 0.6600 handle, before human rationality took over the pair lower, primarily on the knowledge that the data wouldn’t change materially the RBNZ’s interest rate views. Chinese CPI data was also printed yesterday, revealing an-expectation figure of 2.5 per cent – up from the previous 2.3 per cent. Once again however, although inflation is proving to be running a little hotter in China, trader’s judged that the news wouldn’t shift the dial for policymakers and promptly moved on.
    RBA’s Minutes: Of domestic significance, the RBA released the minutes from their recent meeting, with very little novel information to glean: “members continued to agree that the next move in the cash rate was more likely to be an increase than a decrease. However, since progress on unemployment and inflation was likely to be gradual, they also agreed there was no strong case for a near-term adjustment in monetary policy”. The reaction in market was one of the more muted from an RBA release, registering barely a reaction across financial markets. There were some interesting points discussed from a purely academic perspective in the document – some substance for the economics-nerds – especially relating to hot global asset prices, but nothing in the way of potential policy approaches from the central bank.
    FOMC Minutes and Reporting Season: Approaching the half-way mark for the trading-week, investors prepare for its pointier end. The major event will transpire tomorrow morning local time, in the form of the FOMC Minutes from the US Federal Reserve’s last monetary policy meeting. Of course, most of panic and volatility in global markets has come because of the Fed’s hawkishness in recent times, so market participants will peruse the details of tomorrow’s minutes for insights that confirm or deny fears about higher global rates. The broader market will also engross itself further in US reporting season, with Netflix (for one) posting what is being considered currently a better than forecast set of numbers, by way of virtue of a smashing of subscription growth estimates.
  14. 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
  15. 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
  16. 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.

     
  17. MaxIG
    Stocks sell-off in Europe and the US: Global equities appear in pull-back mode. Ignoring Asia’s solid-enough day, European and US stocks have tumbled. The Euro Stoxx 50 shed 1.78 per cent overnight, while the FTSE100 dropped 1.63 per cent, and the S&P500 has given-up 1.65 per cent. It looks as though just when one assumed the latest trade-war developments lacked true bite, the conflicts potential consequences have reared their head in price action. Trade talks this week take-on an even greater significance now. Stamped with the knowledge of how the herd is responding to the latest break down in US-Sino relations, traders will be hyper-sensitive to good or bad trade-talk news.
    Trade-war risk raises questions about fundamentals: It’s a part of why markets have behaved (quite) edgy overnight: trade-related news, and its all-important impact on market fundamentals, has proven had to quantify and predict. The last time trade-tensions were this high, commentators were wrangling with what the material impacts of the trade war would be. Would it derail global growth? How big of an impact would it have on inflation? What might it do to corporate earnings? There were few sufficient answers to these quandaries, and the trade-problem seemed to disappear as US-Sino relations improved last year. They’ll return to the fore now, with market participants no closer to and answer now than then.
    Stocks sell-off in the face of uncertainty: Those answers come with time, and it’s probably not the root of those questions necessarily causing the overnight sell-off, per se. In the short-term, where the vagaries of the market are overanalysed, and the day-to-day movements in the market are rationalized away, a simple dose of uncertainty is all it takes to move sentiment from something “bullish” to something “bearish”. The fact that market participants can’t answer some of the bigger questions relating to the trade war is worse than if they’d received uncomfortable answers to those questions. Faced with uncertainty, traders overcompensate for the lack of information by removing risk, and therefore assuming the worst.
    An overdue pullback? Hindsight is golden, and of course it makes a genius out of us all, but there were signs that the global equity rally has been getting long-in-the-tooth, anyway. And with last night’s relatively big sell-off, price action in US stocks is (for now) behaving as this is a healthy pull-back, rather than another correction. Indeed, all sorts of scenarios sit between those two extremes explanations, and the fortunes of global stocks for the rest of the week will probably manifest as one of them. But given the widely acknowledged disconnect between fundamentals and price, an adjustment in markets looks to be at hand.

    ASX to follow Wall Street’s lead: The SPI Futures contract is suggesting that the tumble on Wall Street will manifest across the ASX200 this morning. According to that measure, the index ought to give up about 67 points, come today’s open. It’ll likely be a broad-based day of losses too, given this information, as safety is sought, and profits are booked by investors. It continues a rather challenging start to the week for ASX bulls. The market was first harmed by the escalation in the trade war on Monday, taking the sheen off of economic growth optimism; and then was bottled yesterday afternoon following the RBA’s interest rate decision.
    RBA rate expectations legs the ASX: Mirroring the dynamic manifesting the world-over, Australian equities were undercut yesterday by the RBA’s decision to keep interest rates on hold, as the repricing of interest rate expectations pushed the marginal investor back into cash and bonds. It’s a dilemma for equity markets here, just like everywhere else: equity valuations have become more attractive for investors due to falling discount rates, rather than true profit growth. Furthermore, a natural lift in the Australian Dollar inhibited enthusiasm within the ASX, rallying towards the 0.7050 mark as traders priced-in a more hawkish RBA than what was expected.
    For the RBA, it’s all about jobs: The market is still expecting the RBA to more-or-less cut interest rates twice this year. Going into yesterday’s RBA meeting, that assumption was unlikely to reverse. However, it was all about the potential imminence of cuts, and with what was handed to traders from the RBA, bets on when cuts will happen has been deferred. There was plenty of detail in the RBA’s communications to the market in their statement yesterday, but the key point was this: the RBA acknowledges that inflation is low and economic activity is soft; however, while the jobs market remains tight, it sees no immediate need to cut interest rates.

    Written by Kyle Rodda - IG Australia 
  18. MaxIG
    The biggest day of the (economic) year: The Australian economy garnered significant attention yesterday. Arguably, it was the biggest day on the economic calendar we’ll see this year. Insights into both the future of monetary and fiscal policy don’t often come on the same day. But yesterday it did: the RBA delivered their monthly decision on Australian interest rates; and the Federal Government handed down its latest budget. The price action in financial markets has thus far been limited – though, granted, we wait for the ASX to open this morning to witness the stock market response to the budget. At least from a purely intellectual standpoint though, both events have given market-buffs enough to chew on, and potentially frame future trading opportunities.
    The RBA stays away from politics: Let’s break it down and start with RBA. If there was ever a meeting the RBA wanted to avoid politicization, it was this one. Unlike what’s happening in the United States, our central bank has been generally insulated from political-ire in the post-truth, anti-establishment era. But surely Dr. Philip Lowe and his team have sharp memories and recall the impact the 25-basis point hike to interest rates in November 2007, weeks before a Federal Election, had on the political discourse. Considering that last night’s budget was just as much a re-election pitch as it was a document of economic management, keeping safely away from the fray was always on the cards for the RBA.
    The economic rationale: And not for unwise economic reasons, either. All Australians know how the game works: an election year budget is a vote-buying budget. In principle, it’s the chance to buy-back the electorate after years of (ostensibly) tough-but-necessary decision making. For the boffins at the RBA, the timing of the situation couldn’t be better: provided it’s implemented responsibly, with the Australian economy in its current state, some meaningful fiscal stimulus from the government wouldn’t go astray. It takes the heat off the RBA, undoubtedly: ideally, the injection of money into the economy will jump-start domestic demand, and boost consumption at a time when households are doing it a little tougher than they have in the past.
    Keeping the powder dry: It helps the RBA keep their powder dry, too. They have 1.50 per cent of potential cuts if things turn sour in the economy to play with, so to speak, before, like some of the world’s other major central banks, they would have to experiment with some unconventional monetary policies. Not only that, but unlike some of the more fiscally irresponsible governments around the world, the Australian government, with relatively low levels of debt, can still afford to pull some fiscal levers. This desire to wait-and-see shone through in yesterday’s RBA statement. They certainly took a more balanced view to economic risks, but they shied away from taking the line that rate cuts may soon prove necessary.

    Picking up the slack: The benefit of this is that rather than just drop interest rates, and risk inflating (certain) asset prices and encourage the accumulation of private debt, targeted spending may add the necessary sugar-hit to revitalize households and their consumption. This is important to the RBA: there are three things really weighing on consumers at present: high-levels of private debt, a fall in house prices, and low wages growth. Now, a touch of fiscal stimulus won’t reverse these challenges in-and-of-itself; and the RBA will need to remain active in managing risks relating to all three. However, the hope is that a quick boost to government spending could do its part to ease the pressures, and perhaps unleash the economy’s animal spirits.
    Forever the lucky country: Now, some of the structural or cyclical factors, from a global economic perspective, will remain unchanged. And that is what is often glazed over or ignore when it comes to Australian economic policy. The pollies will claim it’s an act of volition, but Australia is a small and open economy, and without good-luck, like what’s recently been seen in with our terms of trade, the money would not exist to support tax cuts and infrastructure spending. The problem for the RBA and Federal government, is sluggish wage growth (the thing that both parties are banking on turning around to maintain surpluses and stable monetary policy) is being caused by phenomena outside their control.
    A day for a little judgement: The interesting part of today’s trade is that market participants get a little sample of what the market is think about the combination of yesterday’s RBA meeting and Federal Budget. SPI Futures are indicating a big jump for the ASX200, despite a lukewarm night on global markets. First and foremost, in response to the RBA, the Australian Dollar has fallen with rate expectations and bond yields, as inflation expectations are deferred. Reactions to the budget will probably have to be judged by the behaviour of the ASX, though: consumer stocks outperformed yesterday, in a possible by-the-rumour sell the fact scenario. All of this will unfold around the release of important Retail Sales numbers today, which will give a true update on Aussie-consumers.


    Written by Kyle Rodda - IG Australia
  19. MaxIG
    ASX’s looming recovery: The ASX200 has clawed itself to a level on the cusp of validating the notion that the market has bottomed. It might feel that we ought to already be at that stage, given we sit 7-and-a-half per cent of the markets lows. But turnarounds take time to be confirmed, and now having broken psychological-resistance at 5800, Australian equities are inches away from that point. There are counterarguments to be made, to be fair: the recent rally has come on the back of lower volumes, and the buyers have lost a degree of momentum. Nevertheless, the capacity to push beyond 5800, and then when the time comes, form a new low when the inevitable short-term retracement arrives, would give credence to the “market-recovery” narrative.
    ASX today: SPI futures this morning is pointing to a gain on 7 points at the open, at time of writing. There are several risks that could undermine that outlook. As the laptop’s keys are being tapped, there is 2 hours left to go on Wall Street, and the UK Parliament have just begun the process to vote on UK Prime Minister May’s Brexit Bill. More on that later. ASX bulls today will be searching for a solid follow through from yesterday’s 0.71 per cent gain. The daily candle on the ASX200 chart showed a market controlled by buyers from start to finish: the market never dipped below its opening price, and it finished by leaping to a new daily (and 2-month high) at the close.

    Sentiment; jumping at shadows: There’s a lot of noise in the commentariat about what the price action this week means. It is entirely justified. The December sell-off has punters and pundits hyper-vigilant for a catalyst for the next 4 per-cent intraday move. Collectively, it’s an irrational fear given how rare such occurrences are, but because it is understood that circumstances haven’t changed so drastically from then to now, such a phenomenon feels conceivable. The sentiment in markets has centred largely on speculation about the strength of China’s economy. On Monday, the fall in risk assets was over-attributed to the poor Chinese trade data, while yesterday it was attributed to the announcement that China’s policy makers are preparing stimulus for the world’s second largest economy.
    Mixed price action: The activity in stocks would lend itself to the belief that it is that story moving markets. The price action doesn’t give such a cut and dry indication to that. Indeed, equities were up across the board, and Chinese and Hong Kong stocks led the way. A better barometer for macro-economic drivers are currencies and bonds, and the activity there was rather mixed. US Treasuries have traded largely unchanged. The Japanese Yen is down, revealing greater appetite for growth and risk, as is gold, for the same reasons.  Commodities are mixed: oil is higher, mostly due to diminishing fears of global over-supply. However, commodity currencies like the A-Dollar are down, on the basis that there has been a bid on the USD at the expense of the EUR.
    European slow-down: The major laggard in the (major) currency-world was the EUR overnight. It’s come as-a-result of a speech delivered by Mario Draghi, who made uncomfortably clear his view that the Euro-zone economy is slowing down. Much of this view has been baked into markets, as it is. A series of really-poor PMI figures across the continent in the past month shows economic activity is in decline. It has diminished the prospect of a hike in interest rates from the ECB at any point this year. Markets have lowered their bets from a 50/50 proposition to less than a 40 per cent chance. German Bunds have rallied consequently, with 10 Year Bund yields retracing their recent climb to settle back at 0.20 per cent.

    Brexit vote: Bringing it back to unfolding events, UK Prime Minister May’s Brexit bill, as expected, has been rejected by Parliament. What was perhaps unexpected was the margin of the loss. It was always going to be ugly for May, but the final vote was an abysmal 432-202 against the Prime Minister’s bill. Thus far, and this is fresh as its being written, the price action appears to reflect the old situation of “buy the rumour sell the fact”. The GBP/USD has bounced on the news, rallying from its intraday low at 1.27 to currently trade above the 1.28 handle. Wall Street now, with an hour left to trade, has pared some of the day’s gains. The benchmark S&P500 is battling with the key 2600-level.
    The Brexit-vote fall-out: The commentary will come thick and fast for the rest of the day on Brexit. Members of the house are still speaking on the matter. Another referendum is being called by some, a general election is being called by others, a popular view seems to be one suggesting a delay of Article 50. How this affects the ASX this morning is contentious. SPI Futures have given up its overnight gains and are currently flat. In all likelihood, given that this morning’s events culminate in another little kick of the can down the road, the lift in volatility will pass for stocks. Markets hate uncertainty, so this relieves that anxiety for now. Using the AUD as a guide, the popular global risk/growth proxy is trading flat as of 7.00AM this morning.

     
    Written by Kyle Rodda - IG Australia
     
     
  20. MaxIG
    The bulls are coming back: Traders received the greenlight to jump into risk assets on Friday. It culminated in a substantial jump across global equities and a certain “risk-on” attitude to trading. The impetus was arguably more technical than fundamental. The boost in sentiment in being attributed mostly the leaked news that Treasury Secretary Stephen Mnuchin was planning to lift US tariffs on China. Whatever the motive, nefarious or simply untrue, that story was quickly denied by the White House. However, it signalled enough to the market that progress was being made in trade war negotiations. That extra fuel to this recovery’s fire supported a push above very significant technical levels in Wall Street indices, attracting buyers and further validating the view that the December sell-off is behind us.
    The stock market’s biggest fan: There’s one market participant who is apparently willing that notion to be true: US President Donald Trump. The US President obviously uses the stock market’s performance as a measure of his success – rightly or wrongly. And over the weekend, amidst the very many Tweets that were Tweeted by Trump, this one outlined his view on the US economy and stock market: “the Economy is one of the best in our history, with unemployment at a 50 year low, and the Stock Market ready to again break a record (set by us many times)…” Quite a pledge to make – and one markets participants aren’t going to take too seriously. Regardless, it does provide a perversely comforting story for markets, to know that the US President is wishing this market higher.

    Technical indicators strong: For now, at least, the direction for US, and therefore global stocks, is up. The recovery has scarcely taken a breath to start the new year. Indications are now too that the market (as a whole) is starting to believe that 2019’s early rally is for real. Technical indicators for Wall Street’s benchmark S&P500 were as solid as they have been all year on Friday. Resistance at 2630 was broken through, clearly attracting the many sceptical or nervous market-bulls, pushing the index 1.32 per cent higher for the day. Volume was well-above average for the first time in several weeks too, at 9 per cent above the 100-day average. Breadth was also highly impressive, with 91.3 per cent of stocks higher, and every sector in the green for the session.
    The ASX200 set to follow: Friday’s solid session in US stocks has the ASX200 poised to jump 43 points at the open, according to the last traded price in SPI Futures. The ASX enjoyed its own strong performance on Friday, though it lacked the substance of its US counterparts. Like Wall Street, every sector gained ground on the day. But breadth and volume weren’t a shadow of US markets – in line with the trend of recent weeks. IT stocks were the only sector to attract meaningful interest, largely by way of virtue of a 11 per cent rally from Afterpay Touch Group, after it updated its underlying sales numbers. The ASX200 will eye its 200-day EMA in the day ahead at 5909, a level the index ought to exceed at the open according to SPI Futures.

    China in the spotlight: For all the excitement that markets have achieved the turnaround they were looking for, the week ahead hurls-up several challenges to this narrative. The macroeconomic drivers of market sentiment remain the dual concerns of global growth and US Federal Reserve monetary policy. The biggest risk to global growth comes from China’s economic slowdown – and how the trade war is exacerbating that. Deep insight into the Chinese economy’s state-of-affairs will come today: a major data-dump from the Middle Kingdom arrives today, with GDP figures headlining the lot. Much of the upside experienced in markets recently has come from hope and speculation that the Chinese (and therefore global) economic outlook is better than previously expected. The data from China today will put this hope to the test.

    Australian Dollar: As it always is on these occasions, the Australian Dollar will likely prove to be the barometer for sentiment relating to today’s data from China. There’s been relatively thinner commentary about currency markets, and the A-Dollar by extension, in financial markets recently. There was the flash crash which generated headlines, however putting that aside as a temporary quirk of market malfunction, volatility in currency markets has been quite subdued. Realized volatility in the AUD/USD is presently 5.45 – a very low reading, especially for currency so exposed to risk/growth dynamics – with the pair trading within a 100-point range for best part of 2 weeks. Though by no means guaranteed, perhaps today’s Chinese growth figures will ignite some of the action speculators are craving.
    Other risk events: US markets will be closed on Monday for the Martin Luther King Day public holiday. Several of the secondary and tertiary risk-factors moving markets will keep relevance in the next 24 hours. Brexit will hit the headlines as UK Prime Minister Theresa May prepares to table alternatives to the House of Commons after last week’s failed “meaningful vote”. The US Government shut down will drag on further, after Democrat leaders declined to cooperate with President Donald Trump’s latest salvo to end the stand-off over the funding of his border-wall. And the international economic elite will gather in Davos this week for the World Economic Forum, where issues such as global trade and the normalization of global monetary policy will be the hot topics.
    Written by Kyle Rodda - IG Australia
  21. MaxIG
    The bulls keep control: SPI futures are indicating that the ASX200 will climb another 20 points at the open, adding to yesterday’s bank-led 1.95 per cent rally. Another solid day on Wall Street can also be pointed-to for the market’s start in the green, with US shares continuing their run-higher. Quietness in Asia courtesy of the Chinese New Year holiday has kept some negative headlines way, aiding the bullishness. Global bond markets are steady, gold is off its highs, and credit spreads keep narrowing. Locally, the RBA’s optimism also gave the Aussie Dollar a kick-higher and lifted domestic yields. It’s a risk on attitude, for a multitude of reasons, here and abroad. There’s so much reason to be wary in markets currently; however, the bulls have seen enough to take a gamble in this environment.

    Some classic-cases of can-kicking: One lesson from financial markets in the last week: no person wants to be the one responsible for making necessary changes to something in the long-term, if it means inflicting pain in the short-term. It’s a characteristic of human fallibility and is arguably evidence as to why when crises occur, they tend to hurt more than perhaps what is necessary. There is a parallel with what we’ve seen in the US in the last 7 days, and what has transpired in Australia this week. In the US, it was US Federal Reserve Chairperson Jerome Powell wilting under the pressure of Wall Street in his bid to normalize interest rates. In Australia, it was the Hayne Royal Commissions failure to make the necessary systemic changes to improve the nation’s financial system.
    An invidious dilemma: When presented with the opportunity to make meaningful, structural change, individuals back away from doing so, to clear themselves of culpability for instigating a crisis. Sympathy to these folks who are handed the crushing responsibility of making these invidious decisions. Surely any other rational person would behave and make choices in the same way if put in a similar position. But removing single agents from the equation, and it becomes the case our human-systems remain tremendously difficult to reform without seeing them collapse first. People are motivated by short-term incentives, it ought to be inferred, and will seemingly (more-often-than-not) act according to those incentives, even if it means perpetuating a system that is dysfunctional, or worse, perhaps even immoral.
    No-one wants to be the fall-guy: One can make a blanket, high-level assertion as to why this is so. Our social, political and economic systems are entrusted to people whose mandate is to either ensure compounding prosperity, and a progressive and inexorable improvement of quality of life. When single individual’s take temporary control of a system that will outlast their tenure, they are incentivised to use it to serve their most immediate interests. For the people in power, it doesn’t matter so much that by failing to take responsibility now, they are adding to the grief to be worn by those in the future. It’s better for them to keep the machine rolling and take a gradualist approach of incremental (and superficial) change, even if it means compromising in the future what is being fought to preserved in the present.
    No-one benefits (now) from change: But sometimes, like the broken fridge that keeps needing its parts replaced bit-by-bit to keep it alive, it’s better to throw the whole machine out, even it means going without food for a day. The actions we saw out of the Hayne Royal Commission, for one, amounts to the tinkering of the system, without fixing the whole thing. An oligarchy of private banks has proven to be socially disruptive, but to break up what some call the “cartel”, it would mean major financial and economic disruption. Credit growth would go cold, pressuring the property market and the broader-economy that relies upon it; bank shares would depreciate and erode wealth, weighing on people’s future prosperity; and the Government’s coffers would become emptier, meaning it could do less to serve the nation.
    When it’s good, it’s fine; when it’s bad, it’s too late: As alluded to earlier, the phenomenon witnessed in the fall-out of the final Hayne Report can also be seen in the decision-making of the US Federal Reserve recently. For years, global asset markets have prospered courtesy of the innovative practices central banks have used to support a system that is disposed towards chaos. The pain of making true systemic change is deferred, to keep in place order and stability in the present. When it becomes necessary to unwind some of these practices, when it is justified, if not necessary, just like we have seen in the US recently, the prospect creates convulsions and disarray. Although it’s known that long term objectives will be compromised by short-termism, immediate self-interest once again comes to the fore, and bastardizes the process.
    Instant Karma is (not) going to get you: So much of what happens in financial markets is driven by short-term benefit, in the (often) naïve hope that when things turn truly bad, you’re not the one left carrying the can. Hence why Wall Street has rallied the way it has since the Fed took its dovish turn last week, and why the banks (and therefore the entire ASX) experienced its extraordinary rally yesterday. Market participants are enjoying their spoils now, in the knowledge that if they don’t, they’ll miss-out on the opportunity to take a slice of the good times while they are still on the table. It’s well known certain things need to be fixed, but no one wants to forego short-term benefit, or be the one responsible for bringing about short-term pain, so the system rolls on.

    Written by Kyle Rodda - IG Australia
     
  22. 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
  23. 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
  24. MaxIG
    Are things not so bad after all? It appears there’s emerged a self-reinforcing belief that economic fundamentals aren’t as bad as once thought. There’s not a simple binary that can be reduce out of this – a clear “risk-off” or “risk-on” signal. It’s clear there remains a general sense that the global economy is entering a soft-patch. But in that, is the key: slower growth is taken as granted, however the extent of such a slowdown is ostensibly being revised. There isn’t quite (just for the moment) the same level of catastrophism filling the news wires in financial markets right now. It raises the question whether the fundamentals have changed at all, or whether its actually market participants’ perception of the fundamentals that’s changed.
    Improved perceptions towards fundamentals: An answer to that one is very difficult to grasp just looking at the price-action. To rattle-off one of the stalest of undergraduate clichés: perception is reality. In the case of traders, the rosier perception of economic fundamentals has inspired the emergence of a virtuous cycle in financial market bullishness. Very often, a break from fundamentals, and a movement towards some imagined state of affairs, gives birth to a sufficient enough divergence between sentiment and hard-data that a relatively small catalyst can spark a jolting correction in market-pricing. That may well be the situation market participants are operating. A blithe optimism or not, some key markets are approaching now key inflection points.
    The will to end the trade-war: The big stories that are making this dynamic possible can still be rooted in a dovish US Federal Reserve (and dovish central banks across the world, at that) and a compounding hope that global trade skirmishes are reaching a resolution. Sharing that hope, or maybe trying to fan it, US President Trump is demanding freer trade. Tweeting on the weekend, Trump claimed to have “asked China to immediately remove all Tariffs on our agricultural products… based on the fact that we are moving along nicely with Trade discussions”. Such a statement is to be expected and will be of negligible consequence in the short term. The demand is indicative of where markets see the trade dispute: political will shall drive a breakthrough.

    The (President) Donald Trump Show: Speaking of the US President, and he captured the attention of markets again over the weekend. In a 2-hour monologue at the CPAC conference, he addressed many of the concerns, controversies and crises enveloping his Presidency. Speaking “off the cuff”, as he phrased it, the spectacle could be considered comical, evening entertaining, if it weren’t for the stark reality that the man is the world’s most powerful person. Of financial market import, President Trump fired-up his belligerence towards the US Fed and Jerome Powell: “we have a gentleman that likes raising interest rates in the Fed, we have a gentleman that loves quantitative tightening in the Fed, we have a gentlemen that likes a very strong dollar in the Fed”.
    Higher Treasury yields; stronger USD: It will be interesting to see today how markets react to the President's tirade. Unfortunately for him, his crass words will prove of marginal significance in the bigger picture. The US Dollar is finding plenty of advocates, driven by a renewed belief in the strength of the US economy. Chances of a rate cut from the Fed this year have been unwound. Treasury yields climbed markedly on Friday, despite weaker than expected ISM Manufacturing figures, and a PCE inflation reading that revealed price growth continues to amble below target at 1.9 per cent. The higher yield environment and stronger greenback has wiped the shine off gold (and really, most commodities) falling below $1300 per ounce.
    US markets show risk appetite: The risk is that markets will end up in the position that assets, like equities, will lose their appeal again amidst the higher yield environment. A pertinent and high-impact concern, but seemingly one some way from materialising. Though at a multi-month highs at 2.75 per cent, the 10 Year US Treasury is some way from the 3.26 per cent yield that stifled global markets last year and precipitated the Q4 sell-off. Riskier growth stocks in US tech are seemingly attracting buyers, indicating an underlying bullish moment in the US equity market. Having closed at 2803 on Friday, the S&P500 eyes the 2815 resistance level now as the crucial test for US stock market strength.

    ASX to follow the US lead: For the first time in several sessions, the ASX200 appears poised to follow the US lead this morning. The last traded price on the SPI Futures contract is indicating an 18 point jump this morning, on top of Friday’s closing price of 6192. The market experienced robust trade on Friday, despite soft (but above forecast) Caixin PMI numbers, and CoreLogic data that showed another monthly fall in domestic property prices. In fact: the latter, and its implications for monetary policy, was apparently seen as supportive of Real Estate stocks, which rallied 2.22 per cent on 95 per cent breadth. As far as milestones go, the ASX200 will eye 6230 resistance, ahead of what is a jam-packed week for Australian markets.
    Written by Kyle Rodda - IG Australia
     
  25. MaxIG
    Written by Kyle Rodda - IG Australia
    The pattern continues: Wall Street indices have been swinging about madly again. The pattern continues: an open, a rally or fall, then a retracement or recovery. Today we’ve had an open, a rally, then retracement, then a recovery again. There were stories behind this price-action. Everything that happened overnight appeared perfectly explicable. One wonders though if the swings in trading activity are being overly attributed to headlines. Or perhaps it’s the case that higher volatility and sensitive nerves are leading to accentuated moves. Whatever the cause, fundamentally, the bears still have control of the equity market. There is a softer intensity to the selling on Wall Street this week. However, with the extremeness of last week’s moves having not been unwound yet, what we are seeing is sellers piling in on top of sellers, bit by bit.
    ASX200: SPI futures have turned positive, after oscillating wildly during the overnight session. That contract is indicating a 17-point jump for the ASX200 at time of writing. Yesterday was a tepid but respectable day for Australian shares, managing to muster a 0.4 per cent gain for the day. Volume was slightly above the 100-day average and breadth was okay. Growth stocks led the charge, following US tech’s gains the night prior, with the health care sector up 1.7 per cent, courtesy of a strong bid for CSL and ResMed. The materials space was the biggest points score for the index, adding 8 to the overall index’s performance. The trend is still down for the ASX200, as it is with global equity indices presently. However, yesterday’s daily candle, combined with a bullish divergence on the RSI, suggests some buyers are re-entering the market in the short-term, potentially offering temporary upside to ~5700.

    Headlines: Asia: Let’s look at the headlines in markets, to place what could be a mixed day for global equities into context – starting in Asia and following the turn of the globe. The Asian session was data-dry and lacking in the way of algo-shaking headlines. The resignation of India’s head central banker was meaningful but failed to move the dial outside of India’s markets. Australian business confidence was released and revealed softening sentiment in the sector. China released money supply data and that revealed stimulus from policy makers is filtering through the economy. Japan had a long-term bond auction that demonstrated how lower global yields is affecting appetite for government bonds. The major stock indices were up, in sympathy with Wall Street, except for the Nikkei, which was lower largely due to a stronger Yen.
    Headlines: Europe: Europe handed more information to investors; and it was a very solid day for European equity markets. European Commission President Jean Claude Juncker poured water on any notion of refining the existing Brexit deal. He started that “There is no room for negotiation, but further clarifications are possible”. UK Prime Minister Theresa May met with German Chancellor Angela Merkel to discuss massaging the deal, only (in a comical display of cosmic irony) to become briefly locked inside in her German car at the doorstep of the meeting, before (figuratively speaking) being turned away by Chancellor Merkel. The fundamental data released in the UK was positive, though. The unemployment rate was shown to have held strong at 4.1% last month; and wage growth climbed by more than forecast to 3.3 per cent. 
    Headlines: North America: The US is where all the news and therefore volatility is being made, and last night’s session delivered on that front again. The day’s outset was defined by news the Chinese are willing to lower auto-tariffs on US cars from 40, to 15 per cent. Industrials (auto makers in particular) rallied. Sentiment turned after a combative meeting between Nancy Pelosi, Chuck Schumer and US President Donald Trump raised the prospects of a government shut-down if funding for the President’s border wall wasn’t passed through congress. US Vice-President Mike Pence was there too, but he was busy pulling his I’ll-sit-silently-and -look-like-the-next-President face. Behind the reality T.V. show that is US politics, US economic data was solid, albeit ineffectual: US PPI beat estimates, but all eyes are on tonight’s US CPI data.
    Snapshot of price (re)action: As of an hour to go in the US session, and with sentiment swinging back into the favour of the bulls again, the described news played out in prices like this. Risk appetite was generally higher. US Treasury yields ticked-up across the board: the US 10 Year note is yielding 2.86 per cent and the 2 Year note is yielding 2.77 per cent, narrowing the spread there to just below 10 points. As was implied earlier, the DAX and FTSE both rallied in European trade, by 1.5 and 1.3 per cent respectively. US credit spreads have narrowed. The US Dollar is flexing its muscles, rallying above 97.40 according to the DXY, as the EUR hangs onto the 1.13 handle and the Cable eyes a plunge below 1.25. Typical anti-risk assets, Gold and the Yen, are slightly lower, while the AUD holds onto 0.7200. And in commodities, copper, iron ore, and oil are higher on growth optimism.

    Finding some meaning: Let’s finally try to put a ribbon on things. Going out on a limb: stocks look likely to close higher on Wall Street. So now for a few cursory takeaways from what’s been gathered from the start of the week. CPI tonight will colour this view, but traders are concerning themselves less with Fed-hikes and more with long term growth prospects. Activity in the yield curve last night probably attests to this. Rightly or wrongly, the trade-war is being judged the major threat to economic growth. Breakthroughs in this story last night injected the bullish sentiment into markets. The Huawei story is being ignored for now, which perhaps reveals that US and Chinese policy makers will bite their tongues just to get a deal done. These are good signs for bulls, but as is well understood, these things can turn very quickly.
    The question worth considering is whether a de-escalating of the trade-war will do anything to arrest the global economic slow-down. The risk is, the damage is done; or perhaps even worse, there are even bigger forces at play stifling growth. The-trend-is-your-friend, as the cliché goes, and the trend is pointing to downward momentum in markets. Markets are a huge beast, and cycles move like turning ships. For now, the corrective and bearish price action across asset classes indicates the end of a cycle of some description. Until there are signs of definitive change – that is, a rebalancing from bearishness to bullishness – the matter for equity markets is this: is what we are seeing an uncomfortably but relatively benign retracement within the broad, post-GFC trend-channel; or are these signs that in 2019 and beyond, we are entering a true (perhaps recessionary) bear market?

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