The turn in sentiment can largely be laid at the feet of the ECB last night. ECB President Mario Draghi and his team has seemingly spooked markets, downgrading the Eurozone’s growth forecasts to a measly 1.1 per cent, and announced a fresh program of long-term bank lending to support financial conditions and boost credit creation in the economic-bloc.
3. Euro-falls as ECB rate-hike bets unwound: Market participants knew that such an outcome was likely to come from last night’s ECB meeting. For whatever reason, the confirmation of Europe’s impending slow-down still rattled traders’ nerves. Interest rate markets were awoken back into reality.
The implied probability of a rate hike this year from the ECB tumbled from around 50 per cent to just above 20 per cent. German Bund yields were hammered, falling to 0.06 per cent – lows not seen since the end of 2016. The Euro was gut-checked, as were the Europe-sensitive Scandi currencies and the Pound, galvanizing a flight of capital into US Dollar denominated safe-havens. The USD now sits points away from multi-year highs.
4. Bad news actually meant bad news: This shouldn’t be refreshing, but when bad-news actually means bad-news, it restores a little bit of sense in the financial world. What is meant by this, is that very often, especially as it relates to the US Fed, bad economic news for the “real-economy” is seen as a positive for financial markets.
That is: softer economic conditions implies lower rates and more cheap money, which means its less risky to take a punt on risk assets. It’s perverse to think this way. But seeing a bridge between the “real economy” that most people live-in, and the (arguably) false economy occupied by the minority, provides a bitter sweet consolation that if pain is necessary, then at least its justly shared.
5. Huawei to sue US government: That’s a little abstract, of course. People, policy makers and market participants probably won’t welcome any sort of dramatic tragedy in their financial affairs. Especially so, when geopolitics adds another level of danger to markets and the economy. For one, Chinese stocks were downed during yesterday’s Asian trade, following news that Huawei planned to sue the US government, on grounds that US legislation, recently enacted, banning government agencies from buying Huawei products is “unconstitutional”.
There is a brilliant irony in a Chinese company, with alleged ties to the Chinese government, challenging the constitutional spirit of a US law. It’ll be a political soap opera to watch. For market-bulls, it will be one to watch for its implications for the trade war.
6. ASX registers a solid day: Fortunately, though, for market bulls: yesterday’s Huawei news contained its impacts to Chinese markets. Here in Australia, as alluded to earlier, stocks marched to the beat of their own drum. The weaker Australian Dollar and fall in interest rate expectations continued to support the ASX, with dividend-stock dominated sectors like utilities and the tele-cos leading the market higher.
It will be interesting to see how long the sugar hit related to the assumed rate-cuts from the RBA this year will last. Fundamental growth must come back to fore. And perhaps that will be soon, with the heavily weighted mining sector retracing as industrial metal prices fall; and the banks demonstrate signs of weakness due to a local economic slow-down.
7. US Non-farm Payrolls tonight: Speaking of the Australian Dollar, with the US Dollar rallying like a freight-train this morning, a break into the 69 handle looks increasingly likely. At time of writing, the currency is trading at 0.7010, and could quite easily make its foray below 0.7000 at any stage today. If not, the major flash point could come this evening: perhaps the week’s biggest data release drops – US Non-Farm Payrolls.
The US unemployment rate is expected to have dropped to 3.9 per cent. As always, the key point to watch will be the average hourly earnings number. If it comes into hot, the USD Dollar stands to rally, as markets become forced to price in a rate hike in 2019 by the Fed.
8. Market watch:
SPI futures down 30 points or 0.5% to 6240 at about 7am AEDT
AUD -0.3% to 70.10 US cents
On Wall St at 3.01pm: Dow -1% S&P 500 -0.9% Nasdaq -1.4%
In New York, BHP -0.5% Rio -0.5% Atlassian +0.8%
In Europe: Stoxx 50 -0.5% FTSE -0.5% CAC -0.4% DAX -0.6%
Spot gold -0.1% to $US1285.56 an ounce at 12.44pm New York time
Brent crude +0.4% to $US66.24 a barrel
US oil +0.8% to $US56.68 a barrel
Iron ore +0.6% to $US87.61 a tonne
Dalian iron ore -0.2% to 615 yuan
LME aluminium -0.1% to $US1864 a tonne
LME copper -0.7% to $US6423.50 a tonne
2-year yield: US 2.47% Australia 1.67%
5-year yield: US 2.44% Australia 1.70%
10-year yield: US 2.64% Australia 2.08% Germany 0.06% France 0.42%
US-Australia 10-year yield gap as of 4.44am AEDT: 56 basis points
This column was produced in commercial partnership
between The Sydney Morning Herald, The Age and IG