Wall Street has led the charge of course, overnight adding to the all-time highs achieved at the end of last week. The S&P 500 posted a remarkable gain of 0.72 per cent as that index entered rarefied air, while the Dow Jones added 1 per cent to crack the 26,000-mark once more. Trade wars and emerging market troubles are playing less of a role in market psychology at present, as fundamentals seemingly make their way back to the fore.
The general boost in sentiment arguably manifested best in Asian equities yesterday. The region’s capital markets have been perhaps affected most by trade wars, stemming largely from concerns relating to Chinese financial stability. The PBOC’s announcement of its “counter cyclical measures” to stabilize the Yuan has underwritten trader confidence, with the USD/CNH finding comfort at the 6.80 level. The Nikkei was a standout performer yesterday and may well be the barometer of global share-market strength: that index began to grind through dense resistance yesterday, a successful break of which today could indicate a substantial bullish turn for global equities.
SPI futures are pointing to an ASX 200 which will participate in the upswing today, with that market indicating at time of writing a 24-point jump at the open. The Australian share market has relatively less fundamental information to trade-off this week, given that the economic calendar is comparatively bare, and earnings season is nearing its end. There is justification for the local market to recover last week’s losses, especially if global risks remain at bay and investors can move passed the confidence sapping impact of Canberra’s leadership debacle. A re-entry of trend at 6272 today may flag this dynamic, opening opportunities to climb back toward the ASX200’s decade long highs at 6330.
As it applies to reporting season, of the companies that have reported, 30 per cent have exceeded forecasts and 42 per cent have met them. Despite not quite matching the results of its US cousins, the results do establish a firm base for the ASX 200 to build on recent gains. Volume was remarkably high for a Monday yesterday, but the breadth of the gains was (fairly) meagre, implying that investors believe the market has been a touch oversold, and there is room for a greater recovery. The key ingredient will be a stable global backdrop to trade within, which judging by yesterday’s trade, is showing signs of returning.
Emerging markets are proving far more stable this week, bolstered by several news stories across the globe. China’s support for the Yuan is the headline grabber, but docility in emerging market currencies – such as the Turkish Lira – have reduced fears of financial contagion spilling into developed capital markets. The announcement last night of a bilateral trade agreement between the US and Mexico has added to the sense of relief amongst traders, with Mexican Peso rallying on that news. Emerging market equities will continue to feel the heat, particularly as the US Fed slowly raises interest rates, but for the time being the belief prevails that perhaps an emerging market crisis has (for now) been averted.
Having incorporated the relatively dovish comments from US Federal Reserve Chairperson Jerome Powell’s comments at Jackson Hole over the weekend, currency traders have shifted their positions in the market to reflect current US interest rate expectations. The result of this has naturally been a weaker greenback to start the week, which has fallen to 94.37 as measures by the US Dollar index. While the heat has certainly come out of the USD, the trend for the greenback has yet to reverse, providing traders with ample opportunity to “buy the dip” and potentially take long USD positions, notably against the highly liquid EUR/USD.
The pull-back in the USD has also seen a bounce in gold prices at the beginning of this week, likewise providing opportunities for USD bulls to short the yellow metal. There is an argument that gold has bottomed out now, having bounced off $US1160 a fortnight ago a sustained a short-term rally since then. However, the gold story as it stands is a US Dollar story, meaning the moves in the gold price are predominantly indicative of the fortunes of the greenback. Considering the uptrend in the USD remains intact for now, trade up to $US1235 could be considered natural and within this trading dynamic, with the levels around $US1214 and $US1224 profit taking opportunities for the conservative trader.