Stocks climb off intraday lows as investors bet on more aggressive rate-cuts

Wall Street equities climbed into the close, after an ugly open for the US market overnight, while global bond yields continued to fall, on increased bets of interest rate cuts from the world’s largest central banks.

Stocks recover losses on rate-cut hopes

Wall Street equities climbed into the close, after an ugly open for the US market overnight, while global bond yields continued to fall, on increased bets of interest rate cuts from the world’s largest central banks. When market action is still foggy, it can be hard to draw firm conclusions about cause-and-effect in price action. But it would strongly seem that the latter was responsible for the former during last night’s trade. Hence, US stocks were up on the basis that traders are pricing in a remarkably high chance that the Fed will be cutting interest rates by 50-basis-points at their next meeting, and that the ECB will be cutting rates next month, too.

Cheap money versus cold, hard fundamentals

The impact to valuations of expected interest rate cuts has prettied-up an otherwise bearish market right now. It’s the short-term paradox that confounds people, sometimes: the economic outlook turns bad, so markets price-in lower rates, which drives money into the stock market, as investors chase yield. It’s an almost mechanical process that market prices blithely follow. And frankly, global equities have been juiced for months – to all-time highs, in some markets – as that dynamic plays-out. However, the underlying factors driving that trend are unstable, and reality can only be avoided for so long. Eventually, if the trend doesn’t turnaround, then the fundamentals will win out.

Fundamental outlook still murky

And the fundamental outlook right at this moment isn’t looking positive. The global economy is probably closer to the end of the business cycle than it is the middle-or-beginning. And now a no-holds-barred US-China trade war threatens to accelerate that process. Commodity markets are still betraying best that sense of foreboding regarding the economic outlook. Oil plunged again overnight, as demand-side concerns ratcheted up once more after a bigger than expected build in US crude inventories last week. While gold prices have spiked, to trade as high as $US1510, as markets seek to hedge against lower global interest rates.

RBNZ shocks econo-watchers

The Reserve Bank of New Zealand shocked financial markets yesterday, cutting interest rates at its meeting by 50-basis-points. A 25 basis-point cut was expected by the market leading into the meeting, but few in the market expected the RBNZ to pull out a rare “double-cut”. Such actions from a central bank more-often-than-not come in times of relatively severe financial or economic stress. The decision, therefore, rattled trader’s nerves somewhat. The NZD plunged nearly 2% in the Asian session along, dragging the Australian Dollar down with it. The move from the RBNZ isn’t expected to be a “one-and-done” effort either: another cut is expected by year-end.

A new era of central banking?

The RBNZ’s decision to so aggressively cut interest rates speaks less of the current fundamentals in the New Zealand economy, but more the changing face of central bank policymaking across the globe. Afterall, the data coming out of New Zealand right now isn’t that bad, with growth around the long-term average, the labour market at notionally full-capacity, and inflation is only slightly below target. The move by the RBNZ is tantamount to a pre-emptive strike on a forecast slowdown in the global, and by extension, New Zealand economy. It marks another small milestone for economic policymaking: central banks are extending their mandates to managing the total fortunes of their respective economies.

Bets of RBA cuts increased

In response to the RBNZ’s policy move, market participants have increased their bets that the RBA may prove, in time, to be a little more dovish than expected, too. The odds of future rate cuts were increased and brought forward by interest rate traders yesterday. The interest rate futures curve is suggesting that a rate cut in September is a sixty-forty proposition, a full-cut is baked in for October (once again), and another cut after that, before year-end, is roughly considered a 75% chance. If such an outcome materializes, it would take the RBA’s overnight cash rate to a new low of 0.50%.

Lower rates and currency supports ASX

That dynamic smashed the Australian Dollar yesterday, with the local unit touching decade-long lows at the 66-cent level. Australian Government Bond Yields also notched-up a few (perhaps unwanted) records, too: the 3 Year Government Bond yield fell to a new record low of 0.64%, while the 10 Year Government Bond yield fell to 0.95%. Though clearly a sign of the prevailing concern the market possesses for the Australian Growth outlook, the tumble in the currency and risk-free rates juices the ASX 200 yesterday. The benchmark index waivered alongside its regional counterparts in the early stages yesterday, only to consolidate its gains as the AUD and yields dropped.

This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.

Take a position on indices

Deal on the world’s major stock indices today.

  • Trade the lowest Wall Street spreads on the market
  • 1-point spread on the FTSE 100 and Germany 30
  • The only provider to offer 24-hour pricing

Live prices on most popular markets

  • Forex
  • Shares
  • Indices

You might be interested in…

Find out what charges your trades could incur with our transparent fee structure.

Discover why so many clients choose us, and what makes us a world-leading provider of CFDs.

Stay on top of upcoming market-moving events with our customisable economic calendar.