Trader’s View - US GDP inspires optimism

As far as Australian markets go, they’ll be defined, broadly-speaking, by the unfolding “tale of two cities” story in global markets.

Market data Source: Bloomberg

A tale of two cities

As far as Australian markets go, they’ll be defined, broadly-speaking, by the unfolding “tale of two cities” story in global markets. That is: the renewed optimism about the US growth outlook, versus the deterioration in global economic prospects, led by the slowdown in China’s economy. The Australian economy is heavily geared to the latter, so the hunch is our fortunes will be more greatly impacted by that variable. But it won’t be clear cut, and that’s where the uncertainty and opportunity may emerge. The last 24 hours of trade presented a series of curious themes for market participants, with the subsequent price action patchy. What transpired did shift the narrative somewhat, setting the foundations for an interesting week next week.

Chinese (and global) growth

First, the darker side of (the all too crude) binary: a view on what’s happening in China and the world ex-American economy. The Asian session yesterday was preoccupied first by political theatrics, then macroeconomic information. The Cohen testimony gripped attention, however proved more a distraction as far as traders’ were concerned. The falling apart of the Trump-Kim talks in Hanoi disturbed markets, mostly in North-East Asian markets, such as the KOSPI, before the conclusion was drawn that a grand-peace pact between the US and North Korea was an absurd fantasy to begin with. The true focus was on China’s PMI numbers during our Asian trade – and how, once more, very disappointing they were.

Chinese markets’ bullishness

China’s equities betray a market that sees hope in the Chinese economy. Even despite a slight pullback this week, the CSI300 is still up nearly 21 per cent year-to-date. The data market-participants are getting doesn’t yet support this behaviour, though. Yesterday’s official PMI numbers revealed a manufacturing sector still in contraction by that measure, and a services sector that is softening progressively. It’s probably a combination of the PBOC’s extreme stimulus measures, designed to pump liquidity into the Chinese financial system and boost the supply of credit, plus favourable trade-war developments, that is supporting Chinese equity indices. Both are sentiment boosters, sure. But the market, in the long term, will need more than that to sustain this run higher.

Are commodities leading the way?

To play a bit of devil’s advocate: some (arguably contrarian) punters are suggesting that current market consensus is all wrong. The growth outlook, while not as bright as the end of 2017 and start of 2018, is still reasonably solid. Just look at commodities: copper is leading the way, having broken its recent range to the upside, and now looks poised for a further run. And the gold-silver ratio – a rough but handy barometer of risk-aversion against the growth outlook – is registering an 84 reading. By historical standards, this is high, and may indicate that after all this talk of bear markets, and a synchronized global growth slowdown, the global economy still has some juice left in it yet.

US growth

The other, slightly less ambiguous side, of the “tale of two cities” binary is the US growth story. It was on shaky ground in January and Early February, however last night’s US GDP reading went some way to re-ignite hopes the US economy remains on sound footing, for now. The headline figure exceeded expectations considerably, printing at 2.6 per cent versus a forecast 2.2 per cent, on a quarterly basis. Though it hasn’t manifest in equity markets – all too often good macroeconomic news is seen as bad for risk assets because of its implications for interest rates – US Treasury yields lifted markedly, as interest rate traders rapidly unwound their bets on a Fed rate cut this year.

The US Dollar

Of course, the higher yield dynamic for US denominated assets has generally lifted the US Dollar. As it pertains to the Australian Dollar, the yield spread between 2-Year US Treasuries and 2-Year ACGBs has expanded to 83 basis points, guiding the AUD/USD below 0.7100 once again. Also, a function of the US Dollar, gold prices have broken a short-term trend, suggesting its overdue pullback has arrived. In the medium to long term, a strong argument can be made that the trend lower in global yields and the voracious buying of gold by some of the world’s biggest central banks will underwrite gold strength. Here and now though, and gold looks poised for a brief and necessary wave lower.

ASX 200 waiting for a push

Forever one of the many layers of meat in the global economic sandwich, the ASX 200 will take the themes twisting markets, and translate them, according to SPI Futures, into a 7-point gain at today’s open. If Wall Street’s lead were to be followed, an indecisive and uninspiring day might be on the cards for the ASX. Following yesterday’s solid CAPEX numbers, domestic growth is less a concern; and market internals suggest that that although this rally is long in the tooth, there’s the technical capacity to run higher. But with reporting season ending now, a macro-catalyst may be required to spark the next run higher for the ASX 200: earning’s growth will likely come-in flat YOY, dampening the market’s crucial fundamentals.


This information has been prepared by IG, a trading name of IG Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.
CFDs are a leveraged products. CFD trading may not be suitable for everyone and can result in losses that exceed your initial deposit, so please ensure that you fully understand the risks involved.

Live prices on most popular markets

  • Forex
  • Shares
  • Indices
Sell
Buy
Change
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
Sell
Buy
Change
Sell
Buy
Change
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-

Prices above are subject to our website terms and agreements. Prices are indicative only. All shares prices are delayed by at least 15 mins.

Plan your trading week

Get the week’s market-moving news sent directly to your inbox every Friday. The Week Ahead gives you a full calendar of upcoming economic events, as well as commentary from our expert analysts on the key markets to watch.

For more info on how we might use your data, see our privacy notice and access policy and privacy webpage.

You might be interested in…

Find out what charges your trades could incur with our transparent fee structure.

Discover why so many clients choose us, and what makes us a world-leading provider of CFDs.

Stay on top of upcoming market-moving events with our customisable economic calendar.

All trading involves risk and losses can exceed deposits. Trading CFDs may not be suitable for everyone so please ensure that you fully understand the risks involved. All trading involves risk and losses can exceed deposits.