IG Markets: Notes on Australian markets today

The day's key takeaways:

- Market sentiment stoked by Chinese data, positive US-China trade developments

- If it was the Fed that kept the market alive, it’ll be the PBOC that’ll get it moving

- ASX200 keeps climbing, as traders fade the day’s rally at a key resistance level

The run down:

Risk has gotten a run on today. The catalyst has been last night’s news that the US Treasury has removed the designation of China as a currency manipulator, coupled with a bumper set of trade balance numbers out of the Middle Kingdom. The decision by the Trump administration has emboldened traders, who’ve seen it as another little olive branch to the Chinese, ahead of this week’s signing of the two country’s phase-one trade agreement. The news has driven equity indices higher, first in the US, with the S&P500 and NASDAQ trading at all-time highs overnight. That bullishness has flowed into the Asian region; and has extended beyond the equity market space, too. In FX, the Japanese Yen has “fallen” below the 110 mark, while offshore-Yuan has touched the 6.87 mark – the first time it’s traded at that level since July 2019. Traders are certainly in a growth state of mind, in spite of whatever contradictory fundamentals are hurled in their face.

In essence, even stripping out the funny-business some traders would be engaging in by chasing momentum in what is a very low volatility environment right now, the market is betting big on a global growth turnaround. And at the core of this trade is the notion that a turnaround in China’s economy, supported by lower trade-tensions, but really generated by the PBOC stimulus, will underpin the so-called “reflation” trade. If it was the Fed that kept the pulse of the global economy going throughout 2019, it’ll be PBOC that’s gets it up and walking again in 2020. Similar to the global growth rebound of 2016/2017, monetary policy expansion from the PBOC is looking as though it’ll drive a rebound in global economic activity in the first part of this year. The growth surge is unlikely to be as great as that period’s. But it’s certainly hoped it’ll be enough to see fundamentals catch-up with what are relatively lofty expectations about future economic conditions.

This underlying dynamic is just as much true for the ASX200 as it is for any other equity market across the world right now. It’s surged once again today, rallying by 0.65 per cent, as of 3PM this afternoon, on what’s been some very robust activity. Even those punters trading momentum put aside, investors seem to be pricing in the best of all possible worlds for ASX200 currently. As prices keep grinding higher, valuations keep looking richer, and arguably, unappealing from a value point of view. Nevertheless, in a world fuelled by growing liquidity, as well as a healthy dash of hope, the trend for Aussie equities, just like that of the rest of the globe, is skewed to upside. There’s maybe one potential technical limitation, only in the short-term, that’s emerged out of this session, to the ASX200’s charge higher. It’s sold-off from the boundary line of the trend channel that’s guided the market higher since the middle of August.