Sentiment spike drives stock gains, fundamentals still precarious

There’s a relief rally afoot in global stock markets. Risk appetite has tangibly improved, with price action hinting that the latest bout of trade-war induced volatility is over, for now.

Relief floods the stock-market

There’s a relief rally afoot in global stock markets. Risk appetite has tangibly improved, with price action hinting that the latest bout of trade-war induced volatility is over, for now. The catalysts for the bolstered sentiment in the market are, more-or-less, twofold. The first: the classic case of central banks to the rescue. Ill-conceived or not, but the RBNZ’s highly aggressive 50-basis-point cut on Wednesday seems to have lifted confidence that other global central bankers will be more aggressive in their monetary policy support. The second: successive days of a stronger than expected Yuan fixes has ameliorated concerns that the US-China trade-war will not devolve into an all-out currency war.

Equity indices across the globe rally

Naïve or not, the combination of those two prevailing narratives has led to tangible bullishness in the market in the past 24-hours. The world equity index map is drenched in green, as investors apparently look to buy-up good stocks on the (relatively) cheap. Asian stocks lead the charge yesterday, with the ASX 200 adding 0.75%, and the likes of the CSI300 adding 1.32%. European equities powerfully followed suit, with the FTSE gaining 1.21% and the DAX rallying 1.68%. And as the centre of the financial universe, Wall Street has topped-off the day’s strong activity, with the benchmark S&P 500 climbing 1.88%.

Fear index suggests we are almost out of the woods

Based on gauges of fear in the market, as fallible as they may be, the market is coming close to being out of the woods, in the short-term. To be clear: the fundamentals haven’t shifted an iota. The global growth outlook is hardly any better than what it was at the start of the week. However, sentiment – the overriding, irrational driver of short-term price-action in financial markets – is improving to the point where further gains to risk assets look strongly-possible. Case in point: the VIX plunged last night. It sits around the 17 level now. Readings below 16 generally reflects a market optimistic enough to buy into risk-assets, and push the overall stock market higher.

The fundamentals are probably not better

There’s probably a catch to this, and this where long-term fundamentals come into play. Though stocks are recovering their losses this week at-the-moment, global government bonds haven’t quite retraced their gains. The implications for this ought to be considered crucial to the bigger picture. The general hit an escalating trade-war will have to the earnings outlook remains the same; all that is happening in the market presently is that risk free-rates are happening to be falling at a greater-rate than diminishing expectations for company profits are. That implies that earnings growth, ultimately the true driver of market price, is still in a weakening trend, portending a softer outlook for global equities moving into the future.

Bonds, gold and FX speaking the truth

Government bonds, currency markets, and commodity markets are providing a more accurate gauge on reality, still. The underlying trends in these markets haven’t changed a great deal in the last 24-48 hours, irrespective of what sentiment juicing news has been delivered to the stock-market. The pool of negative yielding government bonds is still swelling, with 10 Year German Bunds yielding below -0.5%, and 10 Year Japanese Government Bonds still yielding sub -0.2%. Gold prices remain elevated above the $US1500 mark, which hasn’t happened since the cheap(er)-money days of US quantitative easing. And the Japanese Yen hasn’t departed from its upward trend, dipping into the 105 handle again overnight.

Rate cuts are coming

The common thread behind of all of those markets is basically one thing: the expectation of some extraordinarily aggressive monetary policy easing from global central bankers. Again, the RBNZ seems to have set an expected precedent on Wednesday: policymakers are going to cut, and cut hard, to get ahead of the forecast economic slowdown. Interest rate curves are demonstration this fact wherever one may look. According to market-pricing, the Fed is a (crudely) 30% chance of cutting rates by 50 basis-points at its September meeting, the ECB will cut rates in September then December, and our own RBA will certainly be cutting by October and likely once again after that, in December.

RBA to headline calendar, ASX to join the party

As it applies to the RBA, market participants will be given the opportunity to test this thesis, somewhat, today. The central bank’s quarterly policy statement is released, and is expected to show a downgraded set of economic growth projections. It feeds into the view that the RBA is setting up for more interest rate cuts, as the global economy accelerates towards the end of this business cycle. Nevertheless, for the ASX 200, what the RBA has to say will be of secondary concern. There’s a wave of relief rushing through markets today, and the ASX ought to catch this today. SPI Futures are suggesting a 31-point jump at the open this morning.

IGA, may distribute information/research produced by its respective foreign affiliates within the IG Group of companies pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the research is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, IGA accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact IGA at 6390 5118 for matters arising from, or in connection with the information distributed.

The information/research herein is prepared by IG Asia Pte Ltd (IGA) and its foreign affiliated companies (collectively known as the IG Group) and is intended for general circulation only. It does not take into account the specific investment objectives, financial situation, or particular needs of any particular person. You should take into account your specific investment objectives, financial situation, and particular needs before making a commitment to trade, including seeking advice from an independent financial adviser regarding the suitability of the investment, under a separate engagement, as you deem fit.

Please see important Research Disclaimer.

Explore the markets with our free course

Discover the range of markets you can spread bet on - and learn how they work - with IG Academy's online course.

Turn knowledge into success

Practice makes perfect. Take what you’ve learned in this index strategy article, and try it out risk-free in your demo account.

Ready to trade indices?

Put the lessons in this article to use in a live account. Upgrading is quick and simple.

  • Get fixed spreads from 1 point on FTSE 100 and Germany 40
  • Protect your capital with risk management tools
  • Trade more 24-hour markets than any other provider – 26 in total

Inspired to trade?

Put the knowledge you’ve gained from this article into practice. Log in to your account now.

Live prices on most popular markets

  • Forex
  • Shares
  • Indices

Prices above are subject to our website terms and agreements. Prices are indicative only. All shares prices are delayed by at least 15 mins.


Prices above are subject to our website terms and agreements. Prices are indicative only. All shares prices are delayed by at least 20 mins.

The Momentum Report

Get the week’s momentum report sent directly to your inbox every Monday for FREE. The Week Ahead gives you a full calendar of upcoming key events to monitor in the coming week, as well as commentary and insight from our expert analysts on the major indices to watch.

For more info on how we might use your data, see our privacy notice and access policy and privacy webpage.

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.