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Wall Street slide despite thin market, bodes poorly for week and quarter: That is because US markets took a dive its opening session and put severe pressure on already troubled technical boundaries across the majors. In pure percentage terms, the day’s losses were hearty; but it was the S&P 500, Dow and Nasdaq slipping trendlines that stood as floors on advances going back at least to the Presidential election that really caught attention. For the S&P 500, a close below the 200-day simple moving average would translate into the end of a 448 consecutive trading day stretch above the baseline. As the opening period for the week, month and quarter; this bodes poorly for the US markets and for the rest of the world.
What happens when liquidity rebounds? With most markets opening for the first day of active trading today, there will be an understandable concern as to whether the dour US sentiment will prove infectious. While many of the global benchmarks are not as precariously positioned on the verge of a technical transition, there is already a weight oppressing many of them from weeks prior. The US equity indices hold a special place in the global speculative scales. They are certainly a measure of ‘risk trends’, but they are a poor one when we gauging value on how sensitive the market is to every slight ebb and flow in collective sentiment. Instead, the Dow, S&P 500 and other large US indices have been heavily skewed towards the positive sentiment and remarkably numb to any swoons. As such, when these hold outs come under pressure, there is a reason to be concerned.
RBA rate decision: The only major central bank to deliberate on monetary policy this week will be the Reserve Bank of Australia. According to the market’s affordance to the probabilities, there is virtually no chance that the central bank does not hold rates and deliver a neutral-to-dovish assessment of the outlook. That is not completely unreasonable given the tepid state of inflation, the added economic concerns related to rising trade wars and concern with certain areas of the financial system such as housing. However, ‘caution’ on monetary policy is steadily turning into ‘complacency’. Looking to swaps, the market is pricing in only a 3 percent chance that the RBA will hike by mid-year and approximately 30 percent that it can lift the benchmark rate 25 basis points before year-end. By the former milestone, only the ECB is seen considered more certain in its anchorage. This absolute view on the path of Australian rates does not afford for the unexpected or even the probably – like a rise in inflation forcing action. What it boils down to is that it will be hard to ‘disappoint’ with dovish rhetoric but any hint of a more hawkish lean could trigger considerable volatility.
PMIs start an unflattering 1Q GDP overview: The redistribution of capital to start the new quarter is one of the primary themes in the financial markets this week. Another is the more ‘mundane’ consideration of global growth trends. There has been a general apathy towards the health of the global economy – particularly its developed world leaders – over the past quarters and years as the moderate but persistent pace of expansion has driven speculators to assume a steady foundation as they instead pursue valuations on more dubious sources. Yet, the assumption that expansion will afford speculators to reach further and further for gains is exceptionally presumptuous. We have already seen evidence that activity is starting to struggle in different regions and economic sectors. And, the PMIs that we are set to absorb this week from the largest developed economies along with the BRICS will add new evidence to our bearing. The manufacturing activity surveys for the US and China (ISM and Caixin respectively) both registered misses. We will start to see the official 1Q GDP figures start to cross the wires in a few weeks, but these timely proxies suggest we may be encouraged by what we find.
Australian Dollar starts quarter near 18-month low: Though the Australian Dollar has seen its benchmark yield bludgeoned to a record low and carry trade appetite has generally faded in contrast to other risk-seeking investment trends, the currency has not come under a complete deluge. That being said, against its most liquid counterparts (the US Dollar, Euro, Pound and Yen); the Aussie currency is averaging out its lowest point in 18 months. It is tempting to look for reversals on pairs like AUD/USD, EUR/AUD and GBP/AUD with technical levels offering stepping-stones and internal dialogue vowing to ‘attempt only small corrections’. However, trying to pick tops and bottoms is a low probably endeavour. Raise your required degree of necessary conviction before attempting it or ‘go with the flow’.
Energy markets fall and metals rise: Another asset class that was surprising for its volatility given the general state of market depth to start of the week was commodities. The energy group was lower through Monday’s session with US-based WTI crude oil notching its worst decline since February 7th – and generally the second worst day this year. Headlines related to trade wars and geopolitical pressures dominated, but that is just as likely a reflection of a slow news cycle day as a genuine reaction to simple details offered as to what goods will be targeted by China in its retaliation to the United States’ previously announced tariffs. A robust advance from gold straddles the same realities. Both crude and gold moves were range bound and were far from their respective key technical levels.
Australian shares open to unfavourable environment: The opening day of the quarter does not look to set an encouraging pace for the ASX 200 and Australian markets. The US tumble will not simply be ignored by local and global investors alike in the country’s markets. Given the general reticence to track to more critical support levels as well as the sway of the RBA decision (including their dour evaluation of the growth balance that will stay their hand) and the steady stream of trade war headlines, there is little silver lining to be found for shares or the index.
Market Data:
SPI futures moved -30.1 or -0.52% to 5759.37.
AUD/USD moved -0.0025 or -0.33% to 0.7654.
On Wallstreet: Dow Jones -2.88%, S&P 500 -2.91%, Nasdaq -3.45%.
In New York: BHP -1.73%, Rio -0.68%.
In Europe: Stoxx 50 0.91%, FTSE 100 0.17%, CAC 40 0.72%, DAX 30 1.31%.
Spot Gold moved 1.36% to US$1343.46 an ounce.
Brent Crude moved -2.25% to US$67.78 a barrel.
US Crude Oil moved -2.86% to US$63.08 a barrel.
Iron Ore moved 0.89% to CNY452 a tonne.
LME Aluminum moved -1.11% to US$2004.5 a tonne.
LME Copper moved 0.74% to US$6714 a tonne.
10-Year Bond Yield: US 2.72%, Germany 0.5%, Australia 2.6%.
Written by: John Kicklighter, Chief Strategist, DailyFX
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