Equities traded mixed throughout yesterday’s Asian session, as traders remained cautious of buying into Chinese and Hong Kong markets, but picked up during the European session, setting the foundations for a solid day on Wall Street. This is not to say selling in emerging market assets isn’t still rife or set to discontinue: the broad emerging market equity and currency indexes are still in a very steep down trend. Instead, the balance of trader sentiment seems to have momentarily shifted back to the view that major developed markets will be insulated from financial contagion.
SPI futures are indicating a 12-point drop for the ASX 200 at market open, on the back of a day in which the index bounced 0.62 per cent. In what comes as a good sign for local investors, breadth in the market yesterday was very respectable and volume was rather high. The gains for the day were driven by a 2.89 per cent rally in Telstra shares, which drove the telecommunications sector to the top of the intraday market map. The healthcare space was a drag on the index, but only because of the fortuitous timing of CSL trading ex-dividend. The materials space brings about the biggest question mark for the ASX200 at present, with commodities prices still falling amid fears of global growth, presenting a possible headwind for the index.
Eyes will be on how swift a recovery towards the 6230-mark can eventuate, for signs that the ASX200 has the capacity to return to its recently lofty highs. Casting an eye over price action the last few months, holding above 6160 has proven to be a formidable task for the local index. At present, the ASX200 sits slightly above this point, but appears prepared to dip back below it, based on SPI futures data. If that level be broken and held above in the coming days, relatively little resistance exists on the way back to the 6230, positioning the ASX well for a renewed climb higher. Of course, this relies on fears regarding emerging market contagion and trade war escalation at bay, but given the markets recent resilience, such a proposition shouldn’t be thought of as unlikely.
Wall Street experienced a solid session overnight, bolstered by a mini-recovery in the major tech-stocks. Fundamental data and the general news flow in the US was light overnight, allowing investors to focus on the oft-cited strong fundamentals of the US market. The NASDAQ jumped 0.61 per cent last night, dragging the comprehensive S&P 500 0.37 per cent higher, while the quiet on the trader war front supported a 0.44 per cent gain for the Dow Jones. The race to new record highs for Wall Street could be back on if trade war and emerging market fears subside, particularly if US stocks hold up well through a month that is historically considered to be challenging.
The most significant move in global markets were in US Treasuries, ahead of the release of all-important US PPI data tonight and US CPI data tomorrow. Though not the US Federal Reserve’s preferred measure of inflation, both data points will feed into expectations about the possible trajectory of interest rate hikes from the Fed. Market participants appear to be warming to the Fed’s forecasts and views on the US economy, pricing in now effectively a 100 per cent chance of a rate hike from the Fed this month, an 80 per cent chance of another hike in September, and another 1-and-a-half hikes for 2019. The shift in interest rate expectations began to manifest in bond markets last night, pushing US 2 Year Treasuries to decade long highs and driving the yield on benchmark 10 Year Treasury Bond to 2.97 per cent.
The higher yield advantage of US denominated assets augurs well for the US Dollar, though the greenback didn’t show signs of it overnight. The US Dollar Index receded slightly last night, primarily due to a boost to the EUR and GBP on the back of the greater likelihood of a Brexit deal being negotiated, along with easing fears of a fiscal blow-up in Italy. The greenback climber against the Yen, reflecting marginally higher risk appetite and a desire for yield. While the Oceania currencies continued to trade as emerging market proxies, with the AUD/USD ticking only slightly higher to 7120, and the NZD/USD clinging onto the 0.6500 handle.
A market to watch today is oil, ahead of tonight’s release of US Crude Oil inventories. The price of Brent Crude has rallied this week as an aggressive storm on the US south coast and speculation about Iran’s supply capacities reignite concerns about production and supply. Brent Crude prices are presently trading at around $US79.20 per barrel, quickly approaching a noteworthy resistance level at $US79.60. The recent rally in oil is looking a little too vertical to be sustained in the short term; however, the fundamentals appear to exist for a higher price of oil. The politics of oil have been conspicuously absent in recent weeks but watch for a break above $US80.00 a barrel as a marker of potential US President Trump Tweetstorm.