Trader's thoughts - Central banks to the rescue?

Could traders be betting that central bankers, in the event of a marked slow-down, will come valiantly to save markets from any economic malaise?

US stock exchange Source: Bloomberg

US NFPs

The final bastion of global economic growth is showing cracks in it walls. Arguably last week’s key-release, US Non-Farm Payrolls disappointed market participants over the weekend, printing well below expectations. It wasn’t a clear-cut, poor print. The unemployment rate dropped to 3.8% and wage-growth climbed to 3.4%. The shocker was the headline number: forecast to reveal a jobs-gain of 180,000, the US economy only added 20,000 last month. It’s given rise to concerns that, given how low the unemployment rate is in the US, and that wages are finally picking-up, the long-thriving US labour market has finally reached full capacity for this economic cycle.

US stocks fall, but losses were limited

That would be bad news for the US and global economy. Despite this gloomy picture painted by NFPs, and an initial knee-jerk reaction, traders sought to see through the data. It was a bad day, ending a bad week, for risk assets on Friday – that’s no question. But given that the weak US jobs figures punctuated a series of weak global economic data, which solidified the fear the global economy is sharply slowing, the reaction in markets was fairly contained. Global stocks certainly put in their worst weekly performance for the year. However, Wall Street’s daily losses were contained to a relatively modest 0.21%, if judged by the
S&P 500's performance on Friday.

Central banks to the rescue?

Could traders be betting that central bankers, in the event of a marked slow-down, will come valiantly to save markets from any economic malaise? Quite possibly. Interwoven between underwhelming economic data out of Asia, Europe and North America have been speeches and meetings from the world’s most powerful central bankers urging calm. Even more importantly, at least as it applies to market participants, central bankers have worked hard to deliver assurances that they’ll deliver policy support, if necessary, to curb any economic slow-down. Market pricing has reacted accordingly: global bond markets continue to rally, as traders price in that the next move from likes of the ECB, Fed and PBOC will be to ease policy.

Interest rate markets

The most noteworthy move in the implied probability of rate cuts has been in US interest rate markets. Following Friday’s disappointing US Non-Farm Payrolls release, bets of a cut from the Fed before the end of 2019 leapt from practically zero, to about 20%. US Treasury yields tumbled consequently, taking the US 10 Year note to 2.62% and US 2 Year note to 2.46%, -- taking yields on European and Asian bonds with it. Gold rallied back to just shy of $US1300 on this basis, and growth-sensitive commodities like oil, copper and iron ore tumbled. Credit spreads also expanded, with junk bond spreads touching levels not registered since the start of February.

Higher geopolitical risk

This "risk-off" off dynamic, as one might label it, is finding itself compounded by the return of geopolitical risks. Over the weekend -- and this will likely carry into the week ahead -- critical impasses have apparently been reached in both Brexit and US-Sino trade-war negotiations. Regarding the former, the Pound tumbled ahead of this week's historic Brexit vote, after UK Prime Minister Theresa May threatened that Brexit may not eventuate if MPs don't back her deal with the European Union. As far as the latter goes, assertions from top-Chinese trade officials that any trade-war deal would need to be "two-way, fair and equal" slightly dented hopes that a resolution to the trade-war was imminent.

ASX comes under pressure

The overall bearishness that coloured market-sentiment on Friday, and over the weekend at that, will translate, according to the last traded price of the SPI Futures contract, in a 14-point fall for the ASX 200 at this morning’s open. This follows a day on Friday of broad-based losses on the
ASX, as Aussie shares succumbed to the pressures that had already enervated their global counterparts, to fall nearly 1% for the session. Granted, it was a day of low activity in the market, as volumes traded slightly below average. But the breadth of losses were noteworthy, with 83.5% of stocks lower for the day, and every sector in the market finishing in the red.

Banks and miners lead losses

Non-cyclical stocks put up a fight in early trade, which benefitted from a degree of sectoral rotation, combined with a continued fall in discount rates. The bearish tide eventually washed buyers out of those sectors, too, however. Financials were by-far the worst performing, subtracting 31 points from the index on Friday, as a parliamentary standing committee grilled the heads of CBA and Westpac, and reminded markets that political risk hasn’t yet disappeared for the banking sector. Finally, the big pull back in industrial metal prices and oil, which had recently rallied courtesy of a de-escalation in trade-tensions, dragged mining and energy stocks lower, sucking a combined 17 points from the ASX 200.


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