A night of mixed messaging, but overarching themes stay the same
Strong US data, ECB stimulus assurances, and mixed messaging from both the US and China about the trade war sent stock markets whipsawing.
Markets more befuddled than fearful overnight:
Confusion reigned just as much as any prevailing sense of fear in financial markets last night. Strong US data, ECB stimulus assurances, and mixed messaging from both the US and China about the trade war sent stock markets whipsawing. A consistent and coherent narrative for the intraday market environment, and how it fits into the broader scheme of things, has probably gone wanting in the last 12-24 hours. All-in-all however, there is still the overarching fear that the world economy is building momentum towards a recession. US Treasury yields are hitting fresh multi-year, if not all-time, lows; while growth sensitive assets are still being generally sold in favour of safe havens.
Not much can be taken from US and China trade-rhetoric
On balance, a slight – to the point of near insignificance – bias has been adopted that the back-and-forth in rhetoric between the US and China displayed positive signs. China suggested the US would need to meet “half-war” in trade talks, while the Trump administration suggested negotiations would need to be on “(their) terms”. Perhaps the notion talks are still being canvassed by both trade-war combatants is a good thing. But that logic is about as firm and comforting as that adopted by the offspring of a soon to be divorced couple: ‘yeah sure, they are fighting again – but at least they are talking now!’
Bearishness still the prevailing sentiment
The VIX is lower, trading at 21, so that gives a superficial read on sentiment. That’s still quite an elevated reading, however – indicative of a market in a bearish mode. US equities did manage to rally into the close. But the price action looks like little more than a dead-cat bounce. Afterall, the stock market is a fickle thing. Fixed income and commodities is where the truth is easier found. And last night, perhaps the truth hurt. Oil prices fell, along with other growth sensitive commodities, while gold edged higher. And US Treasuries yield fell across the curve, with the yield on the 30 Year note hitting an all-time low.
ASX to open lower, after tough day yesterday
It was little less than a terrible day for Australian investors, yesterday. Not that anyone in the market was surprised by the intensity of the sell-off. SPI Futures, after all, made it pretty clear coming out of the Wall Street session yesterday morning that it would be a painful session. Ultimately, it was a day in which all sectors were in the red, and the market close down almost 190-points. It was a highly active day in the end too, with volume over 50% above the 30-day-average. Breadth was also remarkably poor: only 5% of stocks manage to gain for the day.
Jobs numbers soothed the burn yesterday
While investors got-on with palm-mashing the sell-button yesterday, econo-watchers were keeping an eye on the release of local jobs data. And in perhaps what amounts to a modest silver-lining for the day, the figures managed to beat expectations. The Australian economy added 41.1k jobs last month – 34.5k of which were all-important full-time jobs. Admittedly, the unemployment rate could only manage to remain steady at 5.2%. But this was due to another lift in the participation rate to a fresh all-time high of 66.1%. The labour market figures seemingly got the markets small-tick of approval too, with the AUD/USD popping 20-points following the release.
A small issue with the jobs numbers
There was a small black-mark on the data, though, that would perhaps bother policymakers. Once again, the underemployment rate was shown to have increased last month, from 8.2 to 8.4%. Although not the most eye-catching detail, the underemployment figure speaks importantly to the RBA’s biggest bug bear – the issue of spare capacity. The more people “underemployed”, the more slack there is in the labour market. It’s this slack that is constraining wage growth, and keeping price pressures subdued. So: although the jobs numbers were undoubtedly positive yesterday, and a step in the right direction, clear scope remains for the RBA to keep cutting rates.
RBA less likely to cut next month; prolonged cutting cycle still expected
As it stands this morning, and after yesterday’s respectable jobs print, the market considers it a 33% chance, or so, that the RBA cuts again next month. A cut by October is seemingly the market’s base case. As has been said before, the issue is not a matter of if they cut again, but when they cut and how many times they cut. And if Australian bonds yields are any guide, the Australian economy may be in for a prolonged cycle of rate cuts. Long term bond yields are hitting all-time lows, with the yield on the 10-year note tumbling to 0.88% yesterday.
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