In a muted response, Wall Street has edged a trifle higher last night, with the S&P hovering around the 2870 mark. European indices performed a little better, following some strong Services PMI numbers, while Asian indices probably led the pack in the last 24-hours.
3. Bonds tell the story (again): Evidence that market participants are re-pricing their global-growth-concerns, in part due to the trade-war developments, manifested in the bond market. A move inverse to that which markets saw last week, government bonds have retraced their gains, as traders reassess the immediacy of what is a widely accepted slowdown in the global economy.
It’s been the middle of the curve that has demonstrated most movement, with the US 10 Year Treasury note making a foray back above 2.50 per cent; while the equivalent German Bund is making a run out of negative yield. In fact, part of this move in bond markets could explain some of the flatness in equities overnight, as the swift jump in discount rates diminish equities’ relative appeal.
4. Yield fluctuations show in currencies: The slightly, and probably transitory, revision to global growth has naturally manifested in the currency market. The Australian Dollar and Kiwi Dollar performed strongly yesterday, while the Japanese Yen and US Dollar fell. The quick normalisation in bond yields supported the Euro, which continues to hold onto the 1.12 handle in the face of geopolitical risks and a concerning trend in the continent’s growth.
Gold prices also dipped on the normalising yield environment, and sits someway of its highs, though its losses were contained by the weaker greenback. The Pound also leapt higher, but as always, that was due as much to Brexit speculation, as it was to any other macroeconomic driver.
5. Overall: a day of mixed signals: Really, if anything ought to be inferred from market behaviour yesterday, it’s that it was a day of mixed signals. Upside in global equities is practically expected, as earnings forecasts stabilise, P/E ratios remain in a normal range, and monetary policy settings stay accommodative. Certain indicators of the “real economy” are favourable too: the gold-to-silver ratio keeps climbing, credit spreads are falling, while industrial metals keep trending higher.
However, some cautionary signals remain: the VIX looks unnaturally suppressed, the “smart money” isn’t supporting these news highs, and yield curves are completely bent of shape still. The path of least resistance for equities is higher, however the climb there could still be treacherous.
6. ASX to open lower, following solid day: Never to be left behind on a global trend, the ASX200 ought to open a little lower today. The good fortune was flowing for the index yesterday, as the trade-war developments, the Federal Budget fallout, and another big lift in iron ore prices fuelled the market to multi-month highs.
The materials stocks naturally lead the ASX higher, but the effects of the night prior’s budget was plain to see: industrial stocks, the Real Estate sector, and utilities all fed off the news of fiscal stimulus. The eyes were on consumer discretionary space, given the support to households in the budget. It traded slightly higher, though most of the budget’s news had already been baked-in.
7. Retail Sales beats, easing local concerns: The good-news story, in a domestic sense, for Australian markets came in the form of Retail Sales data yesterday. It exceeded expectations considerably, printing month-on-month growth of 0.8 per cent, against a 0.3 per cent estimate.
The fine print was interesting: on the month, Australians spent their discretionary income on eating-out, generally forewent spending on attire, and spent a tiny-bit more on department store spending and household goods. Overall, markets reacted bullishly to the data: the Australian Dollar rallied to trendline resistance at 0.7130-ish, and bond yields jumped as traders repriced the number of expected rate-cuts from the RBA before the end of 2019 to 32 basis-points.
8. Market watch:
SPI futures up 1 point to 6270 at 7.25am AEDT
- AUD +0.7% to 71.18 US cents
- On Wall St: Dow +0.2% S&P 500 +0.2% Nasdaq +0.6%
- In New York, BHP +0.3% Rio +0.1% Atlassian -0.2%
- In Europe: Stoxx 50 +1.2% FTSE +0.4% CAC +0.8% DAX +1.7%
- Spot gold -0.1% to $US1291.03 at 1.58pm New York
- Brent crude -0.6% to $US68.95 a barrel
- US oil -0.5% to $US62.26 a barrel
- Iron ore +3.5% to $US93.08 a tonne
- Dalian iron ore -0.3% to 678 yuan
- LME aluminium +0.4% to $US1896 a tonne
- LME copper +1% to $US6492 a tonne
- 2-year yield: US 2.34% Australia 1.45%
- 5-year yield: US 2.33% Australia 1.46%
- 10-year yield: US 2.53% Australia 1.84% Germany 0.00%
- US-Australia 10-year yield gap as of 7.45am AEDT: 69 basis points
This column was produced in commercial partnership
between The Sydney Morning Herald, The Age and IG