As the G20 approaches, however, expect the markets to remain on edge. And, if volume doesn’t fill out into the event, it can prove a burden, should there be any surprises from the increasingly discordant relationship between those countries on a protectionist course and those still embracing globalization.
Wall Street: Still shaking off the hang over from the Independence Day holiday, US equity markets were showing a bullish but restrained face on their return to trade. The Dow was virtually unchanged through Wednesday’s NYSE session, but the tech-centric Nasdaq Composite used the opportunity to claw back some of its losses ove the preceding week to advance 0.6 percent – notably producing an ‘inside’ day with Monday’s encompassing drop. Headlines for the day started with the concern that global geopolitical risks were rising after North Korea successfully tested an ICBM and then graduated onto the message that President Trump would bring to the G20 followed by the frequent fixation on monetary policy with the FOMC minutes. None of these headlines would do shares much good.
FOMC Minutes: Last month, the Federal Reserve annouced its fourth, quarter-percent rate hike (to a range of 1.00 to 1.25%) as well as its tenative plans to wind down its balance sheet when the time comes to escalate their normalization process. This past session, the central bank released the transcript to the meeting; and the interpretation of hawkish conviction eased, while concern over financial markets’ performance seemed to grow. On the balance sheet plan, the members were split on when to start with some looking to start in the coming months while others suggested deferring the decision until later in the year in order to evaluate conditions. Inflation concerns seemed to play a role into this view with the group referencing the ‘idiosyncratic’ influences on price pressures. More interesting to speculators was the mention by ‘a few’ Fed officials to the high levels of stocks and concern that low volatility was pushing speculative reach and thereby undermining financial stability.
RBA Rate Decision Aftermath: One unintended side effect of this past session’s FOMC minutes was to further put the RBA’s decision the day before in starker contrast. The central bank kept its dovish policy course steady Tuesday morning, suggesting the record low rate was appropriate to achieve sustainable economic growth against a backdrop of slow wage growth, high household debt and low consumption. The ranks of the central banks shifting to the ‘hawkish’ banner have grown especially last week with the BoE Governor warming to the possibility of hikes ahead, while the Canadian head suggested further easing was no longer necessary. The lynch pin may very well be the ECB – considered one of the most dovish central banks in the world. President Draghi and his colleagues have already tested the waters with the ruminations of tightening before only to pull back on sharp market reactions. If the RBA’s global counterparts turn the corner while it holds, expectations will turn negative even if the carry remains (slightly) positive.
Australia and Asia Data: This past session, the AIG’s service sector PMI figures for June offered some optimism, with a six month high for the sector, but the softening of its Chinese equivalent from Caixin weighed on trade and global growth confidence. Ahead this morning, the May trade figure is due. The consensus forecast from economists polled by Bloomberg calls for the surplus to have doubled April’s figure to a A$1.1 billion gap.
Australia Dollar: The local currency was the second worst performer of the major currencies on Wednesday – next to the Canadian Dollar which was driven lower in part by the dive in crude oil prices. That said, the slide was significantly more restrained compared to the previous day’s post-RBA tumble AUD/USD was off as much as 1.8& from last week’s peak through the low of the session. AUD/JPY meanwhile was little changed, but Tuesday’s first bearish close in 8 trading sessions still hung in the air with resistance just above the bull trend peak between 88-87.
ASX: The mirror to the currency, the ASX’s rally Tuesday found little enthusiasm for follow through Wednesday. The six weeks of consolidation between roughly 5,800 and 5,650 is both welcome and unwelcome when compared to indices’ performance in Europe and in the States. The ASX hasn’t suffered the drop seen last week, but neither has it pushed multi-year/record highs recently. Futures point to a modest bullish open to Thursday’s session on the back of Wall Street’s uneven gains.
Commodities: Commodities this past session were a mixed back. Metals, energy and some softs were generally lower on the day. There were some noteworthy bullish exceptions however. Corn and wheat enjoyed sizable jumps – the latter extending its surge to a two-year high. Gold would also see something of a measured recovery – though hardly making up for the damage for the past few weeks. Oil, meanwhile, called a dramatic end to its general 8-day advance with a sharp drop for both WTI and Brent standards.
Market Watch:
S&P/ASX 200 down 20.566 points or -0.34% to 5763.252
AUD -0.066% to 0.7601 US cents
On Wall St, Dow -0.01%, S&P 500 +0.15%, Nasdaq +0.67%
In New York, BHP +0.60%, Rio +0.72%
In Europe, Stoxx 50 -0.03%, FTSE +0.14 %, CAC +0.10%, DAX +0.13%
Spot gold +0.24% at US$1226.34 an ounce
Brent crude -3.77 % to US$47.75 a barrel
Iron ore -1.74% to US$62.90 a tonne
Dalian iron ore at 466 yuan
LME aluminium (cash) -0.05% to $US1920.75 a tonne
LME copper (cash) -0.66% to US$5867.00 a tonne
10-year bond yield: US 2.32%, Germany 0.47%, Australia 2.63%
By John Kicklighter, Chief Strategist, IG Chicago
