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Stocks bullishness feeding upon itself as record highs added to on Wall Street

Stock markets have surged overnight, as the breaking of new highs on Wall Street, and greater optimism about US-China trade negotiations, fires investor’s animal spirits.

Bullishness feeds on itself to drive risk assets higher

It’s merely a follow through from Friday night’s action, but from stocks, to fixed income, currencies and to commodities, a level of bullishness can be witnessed. It’s setting up a strong open for the ASX 200 this morning, which managed to climb yesterday, too, but proved somewhat hamstrung by a souring outlook for the country’s bank stocks. Retail Sales data also disappointed, too, however it didn’t do much to change market pricing, as traders prepare for the RBA to hold rates steady today.

New highs in stock indices invites more buyers into the market

When stock markets break to new highs, “buyers” of all descriptions flood the market. Call it “FOMO”, call it “momentum-chasing”, call it something else that implies greater rationality, but when equity indices hit clear air, they tend to surge, at least in the short-term. The S&P 500 added 0.3% to its record-rally last night – in a day of very high activity – with indices in Europe and Asia following suit. There’s the perception that the global economy, rightly or wrongly, has turned the corner now, with a resilient US economy and low rates across the world driving flows straight into risk assets.

Momentum builds off-the-back-of trade-war progress

Fundamentally, the shift in sentiment has been bought-about by a change in the outlook for the US-China trade-war. Progress is being seen where it wasn’t being seen before, and markets are apparently willing to back a subsequent improvement in global growth. The good news on the trade-war front kept coming last night, too. The latest headlines to bolster market sentiment related to news that the Chinese are willing to sign a “phase-one” trade-deal somewhere in America’s trade-war ravaged mid-west. If that eventuates, it would be a move of profound symbolic value, and would suggest to the market a great leap forward in economic relations.

Right-or-wrong, this shift in sentiment is broad

Perhaps those inclined to be a little more cynical question this surge in stock markets. That seems justified: the world was hanging, ostensibly, on the edge of recession only weeks ago. And perhaps scepticism is justified, given dangers abound in global markets. But assuming market-prices to be a reliable guide, the optimism is spread-widely. Bond yields, especially that of US Treasuries are spiking, and yield curves are steepening, as the growth outlook improves. The USD is regaining its lustre on the yield appeal, but even still, commodity prices are adding to their recent gains. Safe haven currencies are pulling back slightly, too.

ASX to rise, but banks may be a problem for the market

The ASX 200 is expected to open roughly 35 points higher this morning, according to SPI Futures. It backs up a day in which the benchmark index managed to climb 0.3%, by virtue of a broad-based higher in global-growth sensitive sectors of the market. Much like last week, upside in the Australian stock market found itself stifled by the banks, after Westpac’s results disappointed the market, and stoked concerns about the industry’s profitability moving forward. The financial sector’s woes could prove an ongoing challenge to the ASX 200’s bid to reclaim its all-time highs, with the heavily weighted sector showing tentative signs of a downtrend in the near-term.

Consumers not spending their extra cash yet

Australian retail sales data highlighted the economic calendar yesterday. It came-in some way below expectations, printing at 0.2% month-over-month, versus a forecast 0.4%. Though the reaction to the news was rather limited – though some consumer stocks did fall on the news – and won’t change materially the outlook for RBA policy, for now, the Retail Sales miss was a remind that Australian households remain in a somewhat soft state. At least of yet, the stimulus thrown at consumers by way of both tax cuts and interest rate cuts hasn’t significantly impacted their spending behaviour – complicating, in a small way, the RBA’s attempts reignite the Australian economy.

RBA to keep rates on hold today

The RBA meeting will headline action in markets today. The central bank is unlikely to move rates, with only a 6% chance of a cut being baked into the interest rate futures curve. Instead, it’s going to be one of those RBA meetings concerned with the forward guidance. Lately, despite acknowledging the probable need for “an extended period” of low interest rates, the RBA’s commentary has included the clear assertion that the Australian economy is at a “gentle turning point”. Some degree of effort will go into determining that statement means for future RBA policy – and what it implies about the prospect of future rate cuts.

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