Trader's View - Stocks continue to recover, but global growth fears persist

Fear continues to ease, and implied volatility is lower in global financial markets.

Source: Bloomberg

Fear and volatility continue to settle

Fear continues to ease, and implied volatility is lower in global financial markets. The VIX has pulled back to 16, while the S&P 500 gained 0.6% overnight. Perhaps it’s just the eye of the storm; but for now, global equities are generally higher, as the cacophony chattering about the possible dire impacts of an escalation in the US-China trade-war quieten down. True to form, the relative calm last night was brought about by another trade-war headline. This time, it was the announcement from the Trump administration that it would be delaying the imposition of auto-tariffs on some of its major trading partners.

US economic data disappoints

The news supported the bounce in Wall Street stocks, despite a swathe of negative economic data releases yesterday, that cast further doubt on the strength of the global economy. For one, in the North American session, US Retail Sales data was released, and greatly missed expectations. The data showed a paltry 0.1% rise in consumer sales last month, missing economist’s consensus estimate of a 0.7% expansion. Although not impacting equities on the aggregate, the retail sales print added to a slew of soft data relating to the US consumer, and prompted a tumble in US Treasury yields.

Markets increase bets of Fed cuts

In fact, that in and of itself was probably good for equities. Recall: the strength in US stocks so far this year has had less to do with solid earnings growth, and more to do with the consequences of falling discount rates. As such, the continuation of that theme, whereby market participants have increased the implied number of rate cuts from the Fed this year to 30 basis points, supported the run in the S&P 500 overnight. Admittedly, it was secondary – the auto-tariff news, which reinvigorated cyclical stocks, was the real sentiment driver. Nevertheless, it hinted that the overall trend in US equities still possesses its most powerful driver.

S&P 500 still appears in pull-back mode

The way the multiple, risk-positive stories played out last night manifested in some elegant price action. Just in the short-term, market commentary has in a big-way focused on whether the S&P 500 has popped-in a new short-term low, or whether this trade-war catalysed retracement is still at play. All too fittingly, the S&P 500 challenged an intersection of key levels last night, the breaking of which would have supported the notion a proper recovery in that index was underway. Alas, it did no such thing, keeping intact, for another day, a market still, for technical purposes, in something of a wave lower.

Global growth concerns still at play

Momentum is to the downside still, and hasn’t yet demonstrated clear signs of reversing. Of course, it’s a manifestation of the fears about global economic growth – a phenomenon, at least in intraday price action yesterday, showed-up clearer in currencies, rather than stocks. Riskier currencies are generally down, while safe havens are higher, once again. The AUD, for example, keeps making new lows, trading as low as 0.6915 during last night’s trade, as interest rate cut bets from the RBA were increased yesterday, after Chinese economic data greatly missed expectations, and inflamed fears that China’s economy is heading for a slow-down.

Chinese data disappoints

Ironically, the “bad” Chinese data was good for the Middle Kingdom’s stocks, which rallied on the hopes of further monetary and fiscal stimulus. However, again, looking at currencies and rates as a better indicator, the softness in China’s economy is materializing in tangible fears for global economic growth. Using the RBA again as the example, market participants have almost fully discounted two rate cuts from that central bank before year end. This dynamic, in the bigger picture, is still showing up in commodity prices too: though higher for the day, commodities like copper and oil are off their highs, as concerns for global demand mount.

Australian labour market data in focus

As far as Australian markets go, it’s not just global events impacting price action. The labour market is at the centre of concern for traders this week. Wages released yesterday, and on balance, was a negative print, revealing a slight miss in quarter-on-quarter wage growth. That data, too, has the effect of upping bets on RBA rate cuts. In the day ahead, attention shifts to Australian employment figures. Estimates are for labour market conditions to stay practically unchanged. However, a miss to expectations will likely see rate cut bets from the RBA brought forward, perhaps even to as soon as next month.


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