IG Markets: Notes on Australian markets today

The day’s key takeaways:

1. Risk gets taken off the table as traders prepare for loaded economic and corporate calendars
2. The Fed, S&P500 and a possibly interesting start to the new year for the US stock market
3. Gold remains a contentious trade: technicals suggestion consolidation, despite improving sentiment
4. ASX takes a deep dive, while local CPI data all but dashes any chance for a November RBA cut

The run down:

1. Today’s been labelled the calm before the storm. US equities traded flat last night, while risk-assets in the Asian region, generally speaking, have pulled back today, as traders prepare for a litany of risk-events in the coming days. Apple and Facebook reports. The Bank of Canada and the Bank of Japan meet. US GDP is also released. But the headline event, of course, is the US Fed meeting tonight. A rate cut from the Fed is considered a foregone conclusion, with the interest rate futures curve implying a 94% chance that the Federal Funds rate will be lowered. Hence, the keen interest is in the forward guidance. There’s a growing chorus suggesting that the Fed will signal something of an end to its recent easing cycle, as the uncertainties pertaining to the US-China subside, slightly, and the outlook for US economic growth (presumably, consequently) improves.
2. Such an outcome would almost certainly shift markets: there is still one, full rate cut baked into market pricing for 2020 right now. Hypothetically, a complete unwinding of this cut in the market would spark a meaningful climb in US Treasury yields, a rally in the USD, and very likely, a drop in US stock markets. This is most extreme scenario, of course. The situation in US equities is, naturally, the most interesting one, given the S&P500 remains near all-time highs. Taking a very broad, macro view of the S&P500’s technicals currently, some arguably ominous signs exist on the monthly chart, that portends perhaps a looming sell-off for the index. The prices action is exhibiting a rising wedge reversal pattern, fit with the necessary divergences in RSI and volume, implying a reasonably significant downside move could be afoot for the S&P500 moving into 2020.
3. The other contentious market right now, given the shift in sentiment, is that of gold. It’s selling off at present, following the broad-based climb in bond yield across global financial markets. Recall: it’s the trend lower in yields – and the subsequent swelling in the pool of negative yielding– that’s been the primary factor behind gold’s outperformance since 2018. If the speculation that the trend lower in yields is turning with the outlook for the global economy, then gold, in principle, ought to be on some sort of path lower. However, right now, and in slight contrast to fundamentals, the technicals remain notionally supportive of further upside in gold. As in times gone-by over the last 12-18 months, the yellow metal’s price exhibits evidence of consolidation, rather than reversal, suggesting gold’s uptrend holds some life in it yet.
4. On the ASX, it’s been a negative day’s trade, with the benchmark ASX200 shedding 0.7%, as of 3PM this afternoon. The losses have been broad-based too, with market breadth at a lowly 27%, and every sector trading in the red. The sell-off began right at the open, and came despite what was a neutral lead from Wall Street. No story can really be blamed for the sell-off today. One could certainly point to a bit of “risk-off” before tonight’s US Fed decision. A bit of end of month positioning could be another one. As for news flow in Australia today, CPI data was the highlight, and showed inflation came in bang on expectations as 1.7%. Though hardly a solid showing, the data has lead traders to unwind further bets of an RBA cut next week – to just 6%.