3. Global growth concerns deferred: The activity at the margins driving price activity in financial markets overnight speaks of slightly diminished fears relating to the global growth slow down. It has to be said that the weakening growth outlook for the world economy is still hurtling like a freight train towards markets; the news last night simply increased hopes that perhaps there may be some tapping of the brakes when it comes to this phenomenon.
Growth sensitive currencies were the major beneficiaries of last night’s trade-headlines: the Australian Dollar, for one, is edging back to the 0.7100 handle. The US Dollar took a breather from its recent rally, as global bond yields climbed, and credit spreads narrowed – for the first time in several sessions. The confluence factors naturally gave a boost to stocks.
4. US stocks recovery possesses substance: Wall Street is registering its best performance in several days on the back of the risk-on dynamic, though it’s worth remarking volume has been below average and doesn’t do much to validate the market’s strength, just on an intraday basis. Market breadth conversely is portraying a broad willingness to jump into equities, with over 80 per cent of stocks higher for the S&P500 on the session — at time of writing — led by cyclical sectors and the high multiple tech stocks.
What has been encouraging recently about US equities’ recovery in 2019 is the substance behind it: the Russell 2000 (a deeper index made up of relatively smaller-cap stocks) is outperforming, and the SMART Money index suggests a market supported by buying from large institutional investors.
5. Fear is falling, thanks to a friendlier Fed: Considering the balance of evidence, and the irrational, momentum chasing that pushed Wall Street to all-time highs in September 2018 may not be present right now. Fear is diminishing too: the VIX has fallen into the low 15s as of last night – a level also not seen since September 2018. If one were to infer a crude message from current market behaviour, it might be that maybe the Fed-engineered panic in Q4 2018 has been full remedied now.
Of course, it was ultimately the Fed which fed to markets the medicine they were craving – the prospect of higher global rates and tighter financial conditions has evaporated. The strength in fundamentals is indeed waning, but appropriate conditions are in place for traders to take greater risks.
6. ASX to be guided by global growth: As a trickle-down effect, the circumstances are favourable for Australian equities too, especially as our central bank joins the chorus of policymakers backing away from rate-hikes. Given the power of the RBA pales in comparison to that of the Fed, supportive monetary policy is eclipsed by the global growth outlook as the major determinant of the ASX’s direction. It does help in a meaningful way that market participants are receiving soothing words from central bankers, especially as our economy shows signs of slowing, as evidenced by yesterday’ weak home loan figures.
The proof of what market participants see as the main risk to the Australian economy is in the price action, however: since the “Trump-trade-war-truce” news overnight, implied probability of an RBA rate cut in 2019 is once again back below 50%.
7. ASX200 demonstrates will to power-on: The overnight lead has SPI futures pricing in a 27-point jump at the open for the ASX200. If realized, the index ought to challenge and likely break in early trade the resistance level at around 6100/05. From here, on a technical basis, the market meets a cluster of resistance, established during the period in September 2018 when the ASX traded range bound for the better part of a month. It’s been repeated frequently by the punditry that the market is overbought at these levels. Technically that appears true.
But momentum is still in favour of the bulls, so for those with further upside in their sights, perhaps a break and close above 6100 this week could be the signal for some short-term consolidation, before the ASX200 builds strength for its next move higher.
8. Market watch:
SPI futures up 27 points or 0.5% to 6043 at about 6.45am AEDT
AUD +0.6% to 70.99 US cents
On Wall St at 2.48pm: Dow +1.5% S&P 500 +1.3% Nasdaq +1.5%
In New York, BHP +0.8% Rio flat Atlassian +1.8%
In Europe: Stoxx 50 +0.8% FTSE +0.1% CAC +0.8% DAX +1%
Spot gold +0.3% to $U1311.92 an ounce at 1.08pm New York time
Brent crude +2% to $US62.76 a barrel
US oil +2.2% to $US53.55 a barrel
Iron ore -3.2% to $US87.65 a tonne
Dalian iron ore -4.2% to 618 yuan
LME aluminium -1% to $US1862 a tonne
LME copper -0.7% to $US6106 a tonne
2-year yield: US 2.50% Australia 1.71%
5-year yield: US 2.49% Australia 1.74%
10-year yield: US 2.68% Australia 2.11% Germany 0.13%
US-Australia 10-year yield gap as of 6.50am AEDT: 57 basis points
This column was produced in commercial partnership
between The Sydney Morning Herald, The Age and IG