Trade-war and Middle East tensions in focus, following massive week of economic data

A big-week in global financial markets ended on a slightly sour note last week, and sets-up a relatively a soft start to the new trading week, today.

Investors wary, following a big week in global markets

A big-week in global financial markets ended on a slightly sour note last week, and sets-up a relatively a soft start to the new trading week, today. It was truly a jam-packed week, the week just gone, and it had a little bit of everything for everybody. There was plenty on the monetary policy front, some juicy economic data, and several geopolitical problems are ratcheting up and threatening to undermine global economic activity. It’s creating a general wariness in the market right now. The appetite for risk is there, but it’s being shackled by numerous risks, right now.

Event risk in the week ahead less prominent than last

There’s far less high-impact on the economic calendar this week. A lot of the key data-points, though important, will be used to colour market participant’s understanding of current fundamentals, rather than outright re-shape them. A spate of central bankers, including Australia’s RBA Governor Philip Lowe, speak. And European PMI data – released tonight – and US Final GDP and PCE Inflation numbers will provide a health-check on global the global economy. Out of all of this, the central question remains: what’s the extent of this global slowdown, and how do central bankers plan to address it?

A disconnect still exists between the market and policymakers

As it pertains to the latter part of that question, markets are still being made to feel as though they’re being left rather high-and-dry. There appears a fundamental disconnect in how markets and policymakers see the world. Markets are crying out for easier monetary policy conditions; however, policymakers are clearly reluctant to dole-it-out. It hasn’t stopped investors pricing-in a very high-chance of aggressive interest rate cuts across the globe in the next 12 months. But there is a nagging concern that perhaps central bankers won’t come to rescue if the global economy rolls-over – or that if they do, it may come too late.

Central bankers can’t help but wait-and-see

The logic behind central bankers reluctance to the dovish forward guidance the market is looking for is that they wish to “keep some powder dry”. And that makes a great-deal of sense, in and of itself, especially when considering policymakers core problem right now. The greatest variable in the outlook for global growth is one that’s inherently unpredictable: the outlook for the US-China trade-war, and to a lesser extent, the myriad of other geopolitical risks threatening to derail the global economy. A response to these issues by nature can’t come in anticipation of their consequences. Hence, policy makers are somewhat forced to wait-and-see.

Investors remain highly sensitive to trade-war headlines

Investors tacitly understand this concept, partly explaining why markets remain so sensitive to fast-moving news and headlines. The dynamic was illustrated on Friday night, after reasonably benign US-China trade-war news knocked US stocks over, and sent traders running into safe-haven assets. The news: China has cancelled a farm-tour in the US, while US President Trump quashed suggestions the US and China could strike an interim trade-deal. Though barely more than headlines, those stories legged market sentiment to end the week last week. The S&P 500 gave up half-a-per-cent during Friday’s trade, as investors flocked back into government bonds, gold and the Yen in search for safety.

Tensions in the Middle East still growing

Heightening military tensions in the Middle East is also weighing on investor confidence, and that’s playing out in market pricing too. The bellicose rhetoric being fired between the US and Iran is only becoming more extreme, with the US reportedly moving military personnel into Saudi Arabia in anticipation of an outright conflict. Iran snapped back at the US’s aggression by threatening it would “destroy” any country that attacks it. An adequate “war-premium” is apparently still being priced into oil prices – and broader financial markets – as the potential for an economically disruptive war between the US and Iran grows increasingly likely.

The interest for Australian markets

As it applies to Australian markets to begin the week, and the pertinent indicators suggest trade should kick-off calmly. The ASX 200 ought to open roughly flat. The AUD is a skerrick higher, but this is after shedding 1.5% last week. Assuming global politics stays out of the headlines, in terms of local news, the commentariat will probably be fairly pre-occupied with speculation regarding next week’s RBA meeting this week. After last week’s weak jobs data and dovish RBA Minutes, the Aussie Dollar is finding itself sold-off, and stock markets are receiving a boost, as traders give an 80% chance of a rate cut next week.


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