IG Markets: Notes on Australian markets today

Kyle Rodda, Market Analyst, Australia

The day's key takeaways:

- Stocks continue to run higher, supported by a touch of positive data

- Narrative economics: traders hooked on the global reflation story

- The daring and the daft: the types of traders pushing prices higher

- It’s too attractive not to participate in this game of musical chairs

The run down:

The markets are currently looking as though they’ll cruise-on in to the end of the week, barring any major negative surprise between now and the close of US trade. Wall Street handed the Asian region a handy lead, with the ASX200, for one, adding around half a per cent to its record highs. This is of course generally a continuation of weeks of bullish activity in equity markets. However, there has been some news that’s fuelled the market’s engine in the last 24 hours. In North American trade, corporate earnings were solid, adding to what’s been a notionally positive start to the reporting period for US companies. US Retail Sales data beat expectations, and maintained some degree of confidence that the US consumer remains strong. While in the Asian region today, China’s monthly economic data dump broadly beat expectations – though it must be said, at 6.0 per cent, Chinese GDP continues to plumb multi-decade lows.

Again, the rationale, as true-or-not it may be, behind the higher in stocks markets remains untarnished: the combination of ample monetary policy support, diminishing macro-economic risks, and an expected rebound in global growth is keeping risk firmly “on”. The market’s strength is probably little more than a self-perpetuating narrative just at the moment. But as the narrative is increasingly internalized by market participants, the consequent run to buy stocks is reflexively pushing prices higher. It’s risky business, because for all the truth there’s some reason to be optimistic about the outlook for markets and the global economy, it unlikely justifies the market behaving as it is now. Valuation metrics are becoming more stretched by the day – and in some instances, to historically high levels. The P/E ratio for the S&P500 is at a decade long high. While it’s P/B and P/S ratios are nearing levels not witnessed since the Dot-Com period in the early 2000s.

Not that most people in the market can’t see this: there’s no shortages of experts and pundits alike stating why this market is getting a little over the top. But as markets are wont to do, we’ve likely entered a state for the time predicated on the dynamics of the Keynesian beauty contest, rather anything that resembles a rational market. It’s possible that stock prices are being driven higher largely by two groups of traders: the daring and the daft. The daring, with liquidity so well supported, and volatility so low, feel willing to play a game of the “greater fool” to score quick profits. The daft are probably looking at price action, and falling into the trap set by the problem of induction: they believe the self-perpetuating lie that the market rationally discounts all-information at all times, and that money can be made with momentum running so aggressively to the upside.

Of course, this is all your humble interlocutor’s point of view. It’d be ironic, and probably circular, to assume that any individual has greater wisdom than that of the herd. However, even despite the multitude of traders and investors who’d know this market is getting a trifle exuberant, there’s all the incentive to buck better-instincts, and jump in and play-the-game. Lest, after all, policymakers are encouraging them too, and there’s the tantalizing prospect of juicy profit to be made. So: the decision making of rational individual actors leads to an irrational market on the whole. It’s all a game of musical chairs. Traders are the children, and central bankers, the DJs. While the music keeps playing, the rules of the game mean traders have to keep dancing. But when it stops, by accident or design, the rush and panic will begin, and it’s then we’re likely to see a market that more honestly reflects reality.