There’s data flowing from all angles, company earnings are still eating up the newswires, central banks are meeting across the globe, and now we have further tensions bubbling away on the trade war front. Building a clear meta-narrative around these conflicting stories is challenging, with different markets decoupling (at least momentarily), making it very challenging to get a clear read on overall market sentiment. The bulls and bears will clash head to head as we work our way to the end of the week, with a victor far from assured.
Trade war fears: Things were looking quite rosy yesterday morning as Australian traders dusted off their keyboards to get to work: Apple reported and eased the tech-wreck fears that had weighed on Wall Street, while news broke that the US and China were preparing to revisit trade-war negotiations. Although an air of positivity kept markets in tact throughout the day, markets were once again blindsided by news that US President Trump may be considering upping tariffs on Chinese imports into the US from 10 per cent to 25 per cent. Though the news took time to corrode through the markets skin, commodities prices tumbled on the back of the news, and slowly consumed equity markets as the day unfolded.
Overnight session: Wall Street and European markets had to begin the day with their session with the new trade-war news, and perhaps lost some of the opportunities opened by some of the Asian session’s positive news stories. The Nasdaq still took advantage of Apple Inc’s strong showing 12 hours earlier, to recover around half-a-per-cent by time of writing. However, the industrials laden Dow Jones shed 0.32 per cent, while the benchmark S&P 500 is so far trading flat. Earnings season continues of the coming days and weeks, so a return to trading off better news is certainly a high possibility; however, there is every chance a “yuge” Trump trade-war announcement is imminent, to watch for volatility if that comes to fruition.
The US Fed: Stripping back the noise, the biggest event was to last night’s meeting of the US Federal Reserve, at which the Fed lived up to analyst’s expectations and kept interest rates on hold. Naturally in these instances when no rate change is flagged, the interest from markets was in the central bank’s accompanying statement. Despite a small sect of market participants calling a more nervous and dovish Fed at this meeting, the status quo prevailed, with the Chairperson Powell and his team reaffirming the US economy’s strength, and the bank’s commitment to its rate hiking cycle. The next two rate hikes will likely be before the end of 2018, with the first of the two almost entirely priced in for September.
Macro movers: There were some noteworthy moves in financial markets post the Fed meeting. The biggest was likely the rally in US 10 Year Bond yields, which climbed back towards the milestone of 3 per cent. The US Dollar, as represented by the US Dollar Index, crept higher consequently, though it still appears too feeble to push through the mid-94.00 area. Gold was perhaps the biggest loser from the Fed’s hawkishness, tumbling 0.6 per cent overnight, continuing its slide down and opening-up the possibility of testing support at $US1207 an ounce. Equity markets have thus far ignored the news; however, this would change if the US yield curve (however unlikely it appears at this stage) happens to rapidly steepen.
The BOE tonight: The central bank focus will continue today, as fundamental data buffs turn their attention from Fed-fallout to the Bank of England’s meeting tonight. It is tipped that the BOE will lift the UK’s cash rate by 25 bps at tonight’s meeting, taking it to a target level of 0.75%. Fundamental data out of the UK has been respectable, but generally tepid in recent months. The impetus exists for a hike from the BOE in the short term, but trader interest will certainly be directed to what the BOE perceive to be the necessary policy action into the medium term. The Cable will be the asset to watch tonight as this story is revealed: the 1.3240 level on the GBP/USD is the level to watch in the event of a hawkish surprise.
ASX today: Bringing it back closer to home, SPI futures are pointing to a rough start for the ASX 200 this morning, following successive days of flat closes for the Australian market. Concerns about trade wars seem to be manifesting in Australian equities, following the broad bearish sentiment that showed up in safe-haven assets and commodity markets yesterday. In addition to this, bank stocks appear under pressure, as falling property prices and tighter credit markets threaten the financial health of the sector. Strangely, mining stocks have so far been immune from the bearishness, probably due to the expectation of solid company reports in the materials sector. If the day proves to be a soft one for the market, a hold above ~6240 should be hoped for (at a minimum) as an assurance that upside for the ASX200 is still in play.