The Dow Jones, S&P 500 and Nasdaq are all lower for the day, backing-up the modest losses sustained in European shares. The risk aversion is justifiable and reflects the general confusion of investors in a week bereft of powerful good news stories. The focus instead has been on the several distractions bemusing markets, including the unfolding President Trump legal drama, the fledgling trade negotiations between the US and China, as well as the grave situation in some emerging markets. At this stage, global equities still appear to possess enough steam to power ahead, but an increased wariness suggests that further advances will proceed with caution.
SPI futures markets are indicating a stronger open for the ASX 200 today, which at time of writing stands at a 22-point jump. The ASX has given up 130 points from the 10-and-a-half year highs achieved last week, taking the market at close of trade yesterday to a familiar support level just above 6240. On the charts, trade around this mark is significant, representing a levee for the index that has contained losses when sentiment in the market has shifted to the downside. Stripping back the noise that has periodically knocked Aussie shares, on balance there is still a stronger argument that the ASX can continue climb. However, given the market’s sensitivity to global factors and the looming clouds in the macro economy, if the rain starts falling then perhaps that levee may soon break.
In the day ahead, investors will have their attention directed to earnings reports from the likes of Medibank Private and Brambles. The debacle of yet another leadership crisis in Canberra has diverted attention away from reporting season, right when markets are in the thick of its arguably busiest week. The earnings and guidance given by companies that have already reported have generally been received well, providing investors with hope that investment conditions are still ripe. Of the company’s reporting yesterday, Qantas was perhaps the headline grabber, with that company’s share price falling after its net income figures missed estimates and flagged a higher cost base in the future due to higher fuel prices. In a positive news story, Santos shares climbed after that company announced it would pay out its first dividend in two years and plans a major acquisition of Quadrant Energy.
How trade will unfold today in Australian markets will be a point of curiosity given it appears the government’s leadership crisis will come to a climax today. The fact futures markets are pointing to a positive open today does not accurately reflect investor’s attitudes to Canberra’s crisis. On numerous occasions this week, out of hours markets have suggested a jump at the open for the ASX, an outcome that goes unrealized at market open. Ostensibly, this is because of the nervousness that the chaos in Canberra has caused. There is every chance this could materialize again today, particularly if investors start to internalize the uncertainty of this idea: that a leadership spill today will see Prime Minister Malcolm Turnbull walk from Parliament, creating a minority government vulnerable to a no-confidence motion from the opposition, which if passed could result in a snap election.
The week’s most highly anticipated event will transpire in the 24 hours, when US Federal Reserve Chair Jerome Powell delivers a speech at the Jackson Hole symposium. Market participants have begun to question the nerve and conviction of the Fed in recent week, as risks mount to global economic growth and emerging financial markets. Fears around these risks are beginning to manifest in interest rate markets, which has seen bets that the Fed will hike two more times this year decrease, as well as in bond markets, with the spread on 2-year and 10-year treasuries narrowing to 21 basis points. It all portends greater risk for financial markets and global economic activity in the medium term, with commentary on the subject by Chairperson Powell to be closely watched. The dynamic is sure to support the US Dollar, which regained its ascendency overnight and seems poised to renew its bullish run.
International financial markets are keeping cognizant of the quiet and creeping developments in the US-Sino trade war. Without as much a whimper yesterday, market participants greeted the latest round of tariffs slapped by the US and China on one another’s economies. The implementation of these tariffs has long been known, and only amounts to an additional $US16bn worth of goods but comes at the higher rate of 25 per cent announced only a few weeks ago. This latest lurch forward in this trade war appears to be shaking Chinese markets, with the Chinese Yuan slipping back towards the significant 6.90 mark, and China’s equity markets abandoning the mild recovery they staged at the beginning of the week. Regarding the Yuan, watch for how close the currency can approach the 6.98 mark – it may reveal a lot about the policy intentions and attitude of the PBOC and Chinese policymakers.
Turning briefly to what lays in store for next week, the calendar looks a little sparse, characteristic of the last week of a calendar month. The major things to keep abreast of will be US GDP numbers, while locally the big release will be Private Capital Expenditure data. Reporting season on the ASX will settle down somewhat, however earnings out of the likes of Blackmores will be given some interest. The risk is with such a quiet week looming is that markets will have more reason to pay attention to some of the pressing risks in global markets. As trade negotiations between the US and China fizzle and while President Trump vows to press on with his protectionist agenda, the lack of a positive counterbalance in markets may see global equities struggle and riskier assets like the AUD drift.