ASX set to jump as Wall Street rebounds

Australian stocks will join the party this morning, and according to the SPI Futures contract, will bust out of the gate at today’s open with a 34-point rally. Inducing from European and North American trade what we might see today: materials stocks may follow their international counterparts, energy stocks may track a lift in oil, and Australia’s growth stocks in the biotechnology industry should follow US tech’s run higher.

3. US economic fundamentals: US economic data is dense this week, and what it suggest about the US economy will be a theme to watch in the week ahead. After all: growth in the US economy is what many are hanging their hat on to keep global economic activity supported. Retail Sales data last night was the first high-impact event for the week, and it surprised to the upside.

Although January’s woeful figure was revised down again, sales growth in February beat expectations. The result didn’t change fundamentals, though they did shift slightly. US Treasury yields lifted modestly, on reduced bets that the US Fed will have to cut interest rates at some stage in 2019 to support the US economy.

4. US inflation risk: The far more important US CPI figure is released tonight – and will probably amount to highlight for the week in US data. Inflation concerns have become less-of-a-priority for traders recently, owing to the volatility in financial markets, relatively low oil prices, the dimming prospects for global growth, and the US Fed’s assurances that it does not mind overshooting its 2 per cent inflation target.

Nevertheless, inflation risk always reigns – and, if realized, would be quick to quash equity market bullishness. In saying this, the implied probability of this materializing ought still to be considered low. US 5 Year break evens are implying a US inflation outlook of only about 1.85 per cent.

5. Three days of Brexit drama: Though US data is an overarching theme this week, the eyes of the world will probably be on the UK for the next 3 days. It’s more-or-less crunch time for UK Prime Minister Theresa May and her wildly unpopular Brexit bill. A series of votes before the House of Commons to decide on what the UK will do come the March 29 Brexit deadline will transpire over the coming days.

Crudely put, they’ll determine whether to leave the Eurozone according to Prime Minister May’s deal (unlikely); crash-out of the Eurozone without a deal (a possibility); or extend the Brexit deadline and kick-the-can further down the road (likeliest). The Sterling will be the barometer: short-term moves between the 1.28 and 1.34 handle is conceivable.

6. Mixed growth signals: For financial markets, Brexit’s macro-economic impact will probably be contained to UK and European assets. Rightly or wrongly, the view is that the matter concerns regional markets, primarily. Fears about slowing global growth will remain a theme overlayed in the market, nevertheless. And judging from last night’s trade, despite the bullishness in equities, fixed income and currencies, pockets of pessimism still prevail.

Growth sensitive commodities, primarily industrial metals, were down overnight, even in the face of a weaker US Dollar. From a technical standpoint, industrial metals prices are reaching technical trend-line support. If broken below, it may indicate that the market’s flirtation with improved global growth conditions was a mere folly.

7. China’s got the gold-bug: The always contentious outlook for gold prices was of interest overnight, amid the sell-off in commodities and the confused global growth outlook. Gold pulled away from the $1300 pivot point once more, courtesy of the rise in global yields. An arguably more interesting and significant variable in gold’s broader price action was a highlight yesterday: data that revealed China once again increased its reserves of the metal last month.

The most parsimonious explanation here for this phenomenon is that, like the Russians, China is looking to reduce its dependence on the United States by diversifying away from USD denominated assets. It’s a direct challenge to the post-Bretton Woods global monetary system, and one that may support gold prices into the future.

8. Market watch:

SPI futures up 32 points or 0.5% to 6218 near 5am AEDT

AUD +0.2% to 70.60 US cents

On Wall St at 1.56pm: Dow +0.6% S&P 500 +1.3% Nasdaq +1.9%

In New York, BHP +1% Rio +1.5% Atlassian +5.5%

In Europe: Stoxx 50 +0.6% FTSE +0.4% CAC +0.7% DAX +0.8%

Spot gold -0.6% to $US1290.95 an ounce at 1.55pm New York time

Brent crude +1.2% to $US66.53 a barrel

US oil +1.2% to $US56.76 a barrel

Iron ore -2.3% to $US83.79 a tonne

Dalian iron ore +0.5% to 604 yuan

LME aluminium -1.3% to $US1847 a tonne

LME copper +0.2% to $US 6407 a tonne

2-year yield: US 2.48% Australia 1.65%

5-year yield: US 2.44% Australia 1.67%

10-year yield: US 2.64% Australia 2.03% Germany 0.06%

US-Australia 10-year yield gap as of 4.43am AEDT: 61 basis points

This column was produced in commercial partnership
between The Sydney Morning Herald, The Age and IG


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