Trader's view - Trade war jitters spark pull back in global stocks

Global equities appear in pull-back mode.

Source: Bloomberg

Stocks sell-off in Europe and the US

Global equities appear in pull-back mode. Ignoring Asia’s solid-enough day, European and US stocks have tumbled. The Euro Stoxx 50 shed 1.78% overnight, while the FTSE 100 dropped 1.63%, and the S&P 500 has given-up 1.65%. It looks as though just when one assumed the latest trade-war developments lacked true bite, the conflicts potential consequences have reared their head in price action. Trade talks this week take-on an even greater significance now. Stamped with the knowledge of how the herd is responding to the latest break down in US-Sino relations, traders will be hyper-sensitive to good or bad trade-talk news.

Trade-war risk raises questions about fundamentals

It’s a part of why markets have behaved (quite) edgy overnight: trade-related news, and its all-important impact on market fundamentals, has proven had to quantify and predict. The last time trade-tensions were this high, commentators were wrangling with what the material impacts of the trade war would be. Would it derail global growth? How big of an impact would it have on inflation? What might it do to corporate earnings? There were few sufficient answers to these quandaries, and the trade-problem seemed to disappear as US-Sino relations improved last year. They’ll return to the fore now, with market participants no closer to and answer now than then.

Stocks sell-off in the face of uncertainty

Those answers come with time, and it’s probably not the root of those questions necessarily causing the overnight sell-off, per se. In the short-term, where the vagaries of the market are overanalysed, and the day-to-day movements in the market are rationalized away, a simple dose of uncertainty is all it takes to move sentiment from something “bullish” to something “bearish”. The fact that market participants can’t answer some of the bigger questions relating to the trade war is worse than if they’d received uncomfortable answers to those questions. Faced with uncertainty, traders overcompensate for the lack of information by removing risk, and therefore assuming the worst.

An overdue pullback

Hindsight is golden, and of course it makes a genius out of us all, but there were signs that the global equity rally has been getting long-in-the-tooth, anyway. And with last night’s relatively big sell-off, price action in US stocks is (for now) behaving as this is a healthy pull-back, rather than another correction. Indeed, all sorts of scenarios sit between those two extremes explanations, and the fortunes of global stocks for the rest of the week will probably manifest as one of them. But given the widely acknowledged disconnect between fundamentals and price, an adjustment in markets looks to be at hand.

ASX to follow Wall Street’s lead

The SPI Futures contract is suggesting that the tumble on Wall Street will manifest across the Australia 200 this morning. According to that measure, the index ought to give up about 67 points, come today’s open. It’ll likely be a broad-based day of losses too, given this information, as safety is sought, and profits are booked by investors. It continues a rather challenging start to the week for ASX bulls. The market was first harmed by the escalation in the trade war on Monday, taking the sheen off of economic growth optimism; and then was bottled yesterday afternoon following the RBA’s interest rate decision.

RBA rate expectations legs the ASX

Mirroring the dynamic manifesting the world-over, Australian equities were undercut yesterday by the RBA’s decision to keep interest rates on hold, as the repricing of interest rate expectations pushed the marginal investor back into cash and bonds. It’s a dilemma for equity markets here, just like everywhere else: equity valuations have become more attractive for investors due to falling discount rates, rather than true profit growth. Furthermore, a natural lift in the Australian Dollar inhibited enthusiasm within the ASX, rallying towards the 0.7050 mark as traders priced-in a more hawkish RBA than what was expected.

For the RBA, it’s all about jobs

The market is still expecting the RBA to more-or-less cut interest rates twice this year. Going into yesterday’s RBA meeting, that assumption was unlikely to reverse. However, it was all about the potential imminence of cuts, and with what was handed to traders from the RBA, bets on when cuts will happen has been deferred. There was plenty of detail in the RBA’s communications to the market in their statement yesterday, but the key point was this: the RBA acknowledges that inflation is low and economic activity is soft; however, while the jobs market remains tight, it sees no immediate need to cut interest rates.


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