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Mixed night setting up a soft start for Asian markets

Overnight trade might be considered an elegant microcosm for the affairs of financial markets right now.

source: Bloomberg

A night of mixed trade

Overnight trade might be considered an elegant microcosm for the affairs of financial markets right now. The news flow shifted from mixed, to bearish, to bullish, then back to mixed again. The story began with a US Retail Sales data-beat, that cast doubts on the Fed’s need to cut interest rates. That doubt was compounded by more soft-ish bank earnings in the US. The mood then turned decidedly nervous on headlines US President Trump stated his willingness to increasing tariffs on China if he wanted. Before sentiment was salvaged by a speech from Fed Chair Jerome Powell during which he re-affirmed his openness to lowering rates.

Risk-taking dulled in the market

The ultimate result on Wall Street being a slight play out of riskier assets and into safe-haven assets. The S&P 500 receded from its all-time highs to fade back towards the key-psychological level of 3000. Long-term US rates climbed as markets priced-in a marginally better outlook for US consumption. That gave a boost to the USD, which drove the AUD towards the 0.7000 level once again, and pushed gold prices back to the $US1400 mark. The lead sets up the Asian session for a soft-start, with SPI Futures suggesting the ASX 200 ought to extend its three-days of declines and dip around 4-points at the open.

ASX200 drifting lower

The ASX suffered from the same listlessness yesterday that had characterized the night prior’s trade on Wall Street. Somewhat like what was experienced last week: market participants remain effectively still and vigilant ahead of greater event risk at the back end of the week. A play into the safety of government bonds pushed long term interest rates down, with price action in stocks reflecting the difference in income-yield dynamics. The utilities sector climbed, while the Real Estate sector lead the sectoral map. Despite the fall in interest rates, the Australian Dollar remained well supported during the local session, primarily due to a climb in industrial commodities.

RBA confirms it’s on standby

The minutes from the RBA’s most recent meeting were released during yesterday’s local session, and while they offered little disruption to market activity, they did provide insight into the current state-of-mind of the central bank. Global growth risks, and global central bankers’ policy re-actions to them, were greatly examined; as were the current drags on households and domestic consumption. But the key takeaway was this: the RBA will continue to cut interest rates “if needed” to stimulate the Australian economy, and support the ongoing process of absorbing the stubborn “spare capacity” in the labour market that’s currently undermining the outlook for domestic growth and inflation.

The RBA’s clear canvas

The RBA seems to expect that this will be a relatively long and slow process. Such an attitude isn’t a surprise, by any means. Monetary policy is a slow burning fuel when it comes to stimulating the economy. Even still, the moderation, cautiousness and broadness in the RBA’s language betrayed an uncertainty not just in the economic outlook, but also the potential direction for monetary policy. It reaffirms an interesting dynamic whereby the RBA is standing guard for a potential deterioration in local and global economic fundamentals, amid a lingering sense of doubt about whether policymakers across the globe can extend this business-cycle.

RBA ambiguity brings market opportunity

Market action around yesterday’s RBA Minutes reflected the ambiguity betrayed within the document. Market participants weren’t preparing for anything more; the RBA was only ever going to expound on what had already been communicated in its meeting press-release a fortnight ago. Further to that, all the benefits and impact to financial markets from the information received had all but been priced-in by this month’s actual cut. Moving forward, however, the open-endedness of the RBA’s present policy outlook raises the stakes for markets. The next cut, implied for December, could just as easily be brought-forward or deferred, setting up ample ground for volatility.

Global inflation under the microscope

The global macro-theme to keep an eye on in the day ahead is inflation data. A skerrick of it was released yesterday, after New Zealand inflation CPI met expectations, but re-affirmed the need for rate cuts from the RBNZ. It’ll be Canada and the UK’s turn this evening, with each of those economy’s rate outlook in focus. Inflation for both countries is expected to be sluggish – following the disinflation trend brought about by a slowing global economy. If the data inflation misses today, it adds the Bank of England and Bank of Canada to the list of central banks that may need to ease rates soon.

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