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This will likely be the headline theme this week with sentiment probably swinging on how this narrative unfolds. There isn’t a terrific lead being handed to us from Wall Street, which demonstrated its fundamental resilience at the end of last week’s trading but didn’t truly threaten new all-time highs. An easing of fears around emerging markets will support market-bulls, courtesy of the Central Bank of Turkey’s proactive policy stance last week, however the structural concerns relating to emerging markets remain. For global markets, early indications are that this week may be defined by how well traders can traverse these various risks, particularly in the ever-vulnerable Asian region.
ASX: Against this backdrop, SPI futures are currently indicating a 6-point jump for the ASX 200 at the open. The Australian market performed a tepid recovery at the end of last week, closing trade a skerrick below the week’s high. Ultimately the market’s performance boiled down to strong activity in the energy sector, thanks to Hurricane Florence and a spike in oil prices, coupled with a slight recovering in mining and healthcare stocks as global growth fears waned. The financials struggled again, with a growing chorus calling the banks lower amid tighter credit markets, a local property slowdown and a squeeze on margins from higher funding costs. The capacity apparently exists for the local market to push higher if geopolitical risks diminish, but perhaps some play towards resistance at 6220 is required first to demonstrate signs of fundamental strength.
US Shares: Wall Street stands out currently as a lone beacon across global equity indices. US traders effectively shrugged off news during the last North American trading session of the week that US President Donald Trump was instructing his administration to push ahead with the next round of proposed tariffs on Chinese goods. Though none of the major indices really managed to press forward, a more-or-less flat day was a good outcome for US markets, particularly given that the only major event of fundamental significance was the release of below forecast US Retail Sales figures. Early indications inferred from futures markets suggest that another flat day awaits US equities upon the North American open, perhaps a sign of wariness from traders of challenging new all-time highs against a background of economic uncertainty.
Rates and Bonds: Signs of optimism are popping up in other asset classes, with US Treasuries gradually pricing more interest rate hikes from the US Federal Reserve. The yield on benchmark 10 Year Treasuries tipped above 3 per cent on Friday, while the 2 Year equivalent climbed to new multi-year highs around 2.78 per cent, taking the spread between those two assets back to 22 points. Interest rate traders are now pricing in 45 basis points of rate hikes before the end of 2018, and another 1 and a half hikes from the Fed for 2019. As markets prepare for next week’s meeting of the Fed, talk will turn to how sustainable long-term bond yields above 3 per cent are for US Treasuries, given the growing headwinds to global growth. Expect some buying of Treasuries with yields at this level throughout this week, as macro watchers assess the markets capacity to challenge new highs around 3.10%.
Currencies: Rising US bond yields looks likely to underpin US Dollar strength in the medium to long term. The greenback fell over the course of last week's trade, primarily due to rallies in the Pound and Euro on the back of easing Brexit fears, along with upbeat assessments from the BOE and EXB regarding their respective economies. A boost to risk appetite is keeping the AUD/USD from re-testing recent lows, although the pair has repeatedly sold off at the 0.7200-mark, indicating further falls in Aussie Dollar are likely. Most notably, it's activity in the USD/JPY that tells the richest story, with the greenback climbing back above 112 against the Yen, as traders unwind safe-haven positions. The softer Yen augurs well for Asian markets to start the week, particularly the Nikkei which appears primed to push further above support/resistance at 23,000.
Asian equities: Asian markets will continue to be a point of fascination for analysts this week, as investors await to see how this technical bear market is Chinese and Hong Kong indices unfolds. Assessing last week's price action, it looks as though there is more at play in Chinese equities than simply matters relating to trade war concerns. For one: Chinese indices didn't really participate in last week's Asian relief in quite the same fashion as their Hong Kong and Japanese counterparts. It reveals concerns about the fundamentals of China's economy above and beyond the impacts of looming US tariffs. Friday's massive data dump from China may have provided a clue into the situation at play: Fixed Asset Investment is continuing to trend lower, demonstrating diminishing fundamental activity within the Chinese economy.
Commodities: The general rally across the Asian region bode well for commodities markets, with industrial metals rallying off recent lows because of greater optimism regarding global growth. copper was one of the biggest beneficiaries of this shifting sentiment, although that metal did sell off considerably as it approach the $US6000 level. In other commodities, Oil - Brent crude took a break from its dance with the $US80 handle, as the severity of Hurricane Florence diminished; gold prices fell back to around $US1200, failing to break resistance at $US1207 despite the slightly weaker greenback; and iron ore is trading back around $US68 as traders eye the $US70 mark once more.