Markets fall as Trump escalates trade tensions

Of most immediate concern to market participants, were Ross’s comments, who went as far as suggesting that the December 15 date, for which the next round of tariff-hikes are scheduled, could be a “logical deadline”. The comments seem to have scuppered sentiment, with European shares dropping 2 per cent, and the S&P500 losing 0.7 per cent, overnight.

3. Brinkmanship could return to US-China talks: As this December 15 “deadline” approaches, brinkmanship may once again be the name of the game. The view about trade-talks is becoming quite “zero-sum” again, meaning both the US and China may well be angling at trying to use this “phase-one” trade-deal as a way of scoring a political win against the other.

It’s not that this wasn’t always known, however the “trade-deal” narrative in the market had fed upon itself in recent weeks, driving equity market prices beyond what can be considered fair and rational, in the bigger picture. A reversal of this dynamic may be afoot now, as speculators go from bulls to bears.

4. Sentiment could be flipping in stock markets: Not that this dynamic can’t be reversed again with a positive Tweet, or a “leaked” comment to some state-controlled media agency. However, what’s being observed now is classic, short-term market psychology: traders chasing the herd, and hoping they’re not exposed as the “biggest fool”.

Afterall, valuations, positioning and sentiment was getting a bit too bullish. The ASX200 being a big case in point. It’s price action belies totally it’s fundamentals, with the Blended Forward P/E ratio as rich as its been this decade. So: a fundamental recalibration might be coming; and that’s setting up the local market for a big 90-point plunge today.

5. Bonds spike as Chinese, EU PMIs surprise: There’s a quirky little undercurrent moving markets too, and that’s the big climb in bond yields last night. Looking at stock market price-action, the spike yields is counterintuitive. Just for one, the US 10 Year Treasury yield is up 6 basis points, as markets price-in that the global economy ought to turnaround rolling into 2020.

The impetus for this move was a spate of PMI data releases in the last 2 or 3 days – the most significant of those being China’s – that generally beat economist’s expectations. It’s feeding into the notion that the “manufacturing recession” has bottomed – and with it, so has the global growth slowdown.

6. US ISM PMI data misses, prompting Dollar sell-off: Now, there was a notable exception to the “positive-PMI” story yesterday, and that came from a miss in the crucial US ISM Manufacturing PMI data. That cooled the run higher in bond yields upon its release, and probably compounded the sell-off in stock indices in the North American session.

The data also knocked down the US Dollar considerably, and re-introduced a level of volatility into the FX space that had been frustratingly absent in the market for several weeks. The combination of a weaker US Dollar and solid Chinese data has proven a benefit to the AUD, which leapt 0.9 per cent last night.

7. RBA expected to keep rates on hold today: The day ahead will be highlighted by this afternoon’s RBA meeting. The central bank is very unlikely to do anything with rates today, with traders pricing in a lower than 10 per cent chance of a cut.

Instead, this’ll be a meeting likely spent determining the chances of when the next cut ought to occur. After last week’s speech on “unconventional” monetary policy, traders moved to price-in a high chance the RBA will cut rates to 0.25 per cent in 2020. The first step in that process ought to come in February: the market is ascribing a 60 per cent chance of a cut at that meeting.

8. Market watch:

ASX futures down 88 points or 1.3% to 6779 near 7.15am AEDT

  • AUD +0.9% to 68.21 US cents
  • On Wall St near 3.15pm: Dow -0.8% S&P 500 -0.6% Nasdaq -1.1%
  • In New York: BHP +0.3% Rio +1.2% Atlassian -5.9%
  • In Europe: Stoxx 50 -2.1% FTSE -0.8% CAC -2% DAX -2.1%
  • Spot gold flat at $US1464.25/oz near 2pm New York
  • Brent crude +0.8% to $US60.95 a barrel
  • US oil +1.2% to $US55.84 a barrel
  • Iron ore +1% to $US88.45 a tonne
  • Dalian iron ore +1.2% to 648 yuan
  • LME aluminium +1.1% to $US1790 a tonne
  • LME copper +0.3% to $US5883 a tonne
  • 2-year yield: US 1.61% Australia 0.70%
  • 5-year yield: US 1.65% Australia 0.73%
  • 10-year yield: US 1.83% Australia 1.09% Germany -0.28%
  • 10-year US/Australia yield gap near 6am AEDT: 74 basis points

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

Listen to IG’s podcast Chatting Markets here

Information is of a general nature only.


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