IG Markets: Notes on Australian markets today

The day's key takeaways

Kyle Rodda, Market Analyst, Australia

The day's key takeaways:

- Stocks rally into the end of the week, as WHO designates the coronavirus an “emergency”

- Concerns grow about the global economy: coronavirus the catalyst, not the cause of this sell-off

- Growth sensitive assets tumble, and safe havens spike, with the “reflation trade” turning over

- Traders await improvements in economic data: a little bit of it came today with Chinese PMIs

The run down:

Stock markets are staging a rebound to end the week. Implied volatility is still relatively high, and speaks of an overarching anxiety, if not bearishness, towards stocks and other risks assets. But just as it stands this afternoon, equities and stock market futures are in the green, as traders continue to mull the possible economic impacts of the coronavirus. Positivity was stoked late in US trade overnight, after the World Health Organisation’s convened a special meeting on the issue. It announced that it now considers coronavirus an international emergency, that it has confidence in policymakers, especially those in China, to tackle the outbreak, and that it does not see further curbs on the movement of people necessary to better contain the virus. Clearly soothed by the WHO’s level-headedness, the developments managed to spark a pop in risk assets today – though upside momentum did find itself crimped by reports this afternoon that the US has advised Americans not to travel to China.

Market dynamics are important to keep in mind here, and the volatility in financial markets must viewed in its broader context. Fear and uncertainty is undoubtedly heightened in the market at the moment. But markets – especially equity markets – had become quite a tall and shaky house of cards prior to this coronavirus inspired sell-off in risk assets. Things were due a little sell-off. Certainly, the coronavirus will have a tangible impact on the Chinese, and by extension, global economy. However, it’s unlikely to prove the difference between a global growth rebound, as has been progressively priced-in by market participants since October, and a total 180 degree change in global economic conditions. Interestingly, instead, what the coronavirus, from a global markets perspective, has achieved is that it’s forced market participants to really re-evaluate their central thesis that the so-called “reflation trade” is on. Growth proxies have shuddered in recent days, as the long-awaited prick-up in global fundamentals takes its time to arrive.

The general view remains that with all the stimulus plied to the global economy, coupled with lower geopolitical risks, that fundamentals ought to improve in the 6-12 months ahead. However, the conviction by which the market holds that view has diminished tangibly. Growth sensitive assets and markets have taken a bit of a belting in broader financial markets, with the subsequent risk aversion manifesting clearly in safe haven assets. The best barometer, the copper price, has taken a flogging, having fallen a hefty ten per cent from its January pique. Oil prices are behaving in a similar, as concerns about global energy demand mount. And the Aussie Dollar, as the punters risk-proxy du jour, is heading towards the 66-cent mark. On the flipside, the Japanese Yen is catching quite a bid. And US Treasury yields, which never really bought fully into the “reflation trade”, are trading near their October lows – and even more bizarrely, the Treasury yield curve has inverted once again.

That sort of price-action doesn’t speak much about the confidence market participants have in future growth. How levels of support, made back in October, hold-up in all of those markets will be telling of whether this “reflation trade” is simply at a crossroads, or total dead end. Of course, time will tell, but regarding cold-hard data in the here-and-now, a touch of it came in the form of Chinese PMI numbers this morning. And overall, the result was judged positively. The Manufacturing PMI component came in bang-on forecast, and only just in expansionary territory at 50. But Non-Manufacturing numbers were much stronger than forecast, coming in at 54.1, versus the 53.0. That took the Composite PMI figure to 53 – a figure that was lower than last month, but better than estimated. The short-term response to the data has been favourable. The AUD/USD jumped 0.2 per off the back of the release, oil prices also edged higher, and stock indices saw a slight bid.


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