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Trader’s Thoughts – Downgrades and earnings misses add to risk-off sentiment

The week has kicked-off with familiar concerns relating to the global growth outlook.

Stock start slow; growth is the concern

The week has kicked-off with familiar concerns relating to the global growth outlook. It certainly feels though the theme hasn’t really changed, which is true. There were a few new elements to the narrative added overnight though, that mean the story has evolved in a reasonably important way. To take it straight off the headlines: US earnings season is as hot as it will get, and market participants received a few of the shockers they were suspecting they’d been preparing for. From day-dot this earning’s season, macro-watchers were waiting for reports from company’s they considered the proverbial canary in the coal-mine. That is: big cyclical stocks exposed to the trade-war and a global growth slow down, that may confirm or deny whether either or both concerns would begin to weigh on corporate profits.

Fears come to fruition

Throughout the week such firms will report or provide crucial updates. But last night things truly got underway: industrial giant Caterpillar and US chipmaker Nvidia reported, and generally disappointed the market. The former has been long one to watch as the “synchronized global slow-down” story took-hold; while the latter has found itself as one of the corporate victims of the US-China trade animus. Overnight, trade delivered on bulls’ worst fears. Caterpillar posted its biggest quarterly profit-miss in a decade before the US market’s open, sinking the share price by just shy of 10 per cent. And Nvidia tumbled 14 % after it cut its revenue forecast, primarily due to the trade war and China’s persistent economic troubles.

Wall Street weakness

Wall Street indices have been legged subsequently, with sentiment truly sapped. It’s written clearly across the index map: the industrial heavy Dow Jones is off 1.15% at time of writing, and the tech-heavy Nasdaq is down 1.34%. The more comprehensive S&P 500 meanwhile is holding declines to about 1.00%. Given everything going on this week, some risk is surely being taken off the table. Unless a part of the minority who thrive on uncertain conditions, risk-events are so rife this week that exposure to more risk than is tolerable is presumably unwise for investors. With all this said, there’s no clear-cut signal that US stocks’ recovery is over. But the VIX is up slightly, and very short term “double-top” in S&P 500 chart is visible.

The calendar this week

Analysing the S&P 500 as the most comprehensive gauge of US equity market performance, and while it manages to hold above key support/resistance around 2630, things ought to be okay for the bulls. In all, this week could be about a move to the sidelines rather than a wholesale move-out of equities. Traders could be forgiven for experiencing a slice of sensory overload presently. US earnings is making the most noise, but the calendar looks dense and a little daunting. The FOMC meeting will get underway in the next day or so, Chinese Vice Premier Liu He travels to Washington for trade-talks, there’s another Brexit vote due, and the data docket is full to the brim with releases like US Non-Farm Payrolls numbers and European GDP figures.

Central bank speak

Anything with the slightest implications for growth will be watched closely. The discourse analysis will get underway when US Fed Chair Jerome Powell starts talking after the Fed’s policy announcement Thursday, with bulls praying that Powell strikes a dovish tone and sticks well to script. One must imagine that’s what he will do: it can’t be enjoyable for the man to watch the stock market strip billions of dollars of value whenever he makes an off-the-cuff comment. It’s demonstrably not market participant’s highest concern currently, but the world’s second most important central banker, Mario Draghi, spoke last night too. He wasn’t anywhere near as circumspect as the bulls hope Powell to be, hammering home again that Europe is heading for an economic slowdown, and fingering China and the trade-war as the prime culprits for this.

Moving out of the way of risk

The intermarket price activity manifested the worries announced by policymakers and US corporates. A flight to safety is in play, as traders choose to simply get out of the way of potentially volatile assets. The USD has been one that has fallen out of favour: traders are pricing in a steady Fed for 2019, and this has weighed on the greenback. The Euro has recovered its losses consequently, and gold is playing with $1300 resistance again. The yen is of course the outperformer, while the Pound is a little lower. Oil is off, this time on fears more related to demand, and the Aussie Dollar is down despite a lift in iron ore. Finally, US Treasuries have caught a bid, though remain safely within a trading range.

ASX to reverse

Perhaps waking up as bleary eyed as the rest of us following the long weekend, SPI Futures are indicating a (fairly) sizeable fall for the ASX 200 this morning of 30 points. Australian stocks performed well to end last week, managing to close above 5900 again on very respectable volume and with market-breadth at 80%. The 200-day EMA proved a worthy foe for the bulls once again, with traders failing to launch the index above that level. Some degree of support is being found in the 100-day EMA however. Given what is presumed to be a bearish day for the ASX 200 today, an eye will be kept on that support level, along with the more formidable area of support between 5780 and 5800.

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