Trader's View - Risk assets rally; but is the sell-off over?

Financial markets have thawed somewhat following Monday’s big draw down in global equities.

Source: Bloomberg

Global stocks recover some of their losses

Financial markets have thawed somewhat following Monday’s big drawdown in global equities. The VIX has pulled back once again from its highs, to be trading within an 18 figure currently, and risk assets have climbed overnight. Stocks throughout Asia still registered losses in yesterday’s session, but European and US equities rallied – the S&P 500 closed up by 1%, the Euro Stoxx 50 closed up by 1.31%, and the FTSE 100 closed up 1.09%. Amidst all the noise of a freshly volatile market, the core issue is this: whether global equities have put in a new short-term low, or whether the sell-off ought to continue.

Is the pullback over

The answer to that question is mired in the inherent confusion of the short-term swings in the market. In this instance: to what extent does the sell-off represent genuine, fundamental concern about the global growth impacts to the trade war, and to what extent does it reflect profit-taking in what was up until recently an overbought market? As always, one day’s trade a trend does not make; so, the truth will take some time to become clear. However, from what can be inferred from the limited evidence gathered overnight, risk-assets are not quite out of the woods just yet.

The S&P 500 the centre of concern

It always is, really, so the coming statement is almost redundant: the barometer for global stocks will be the fortunes of the S&P 500. It’s over 4% off its highs as of last night’s session, marking the most meaningful pullback in that index since the beginning of this rally on December 24 last year. Again, judging last night’s price action, the balance of risks in the short-term seem skewed to the downside, marginally. The S&P 500 sold off into the close after failing to challenge support/resistance at its 50-day moving-average at 2855; and currently looks compelled to revert towards its 200-day moving-average near 2775.

Growth exposed assets still struggle

Of course, time will tell whether this process of mean-reversion materializes, especially given how head-line sensitive this market is, at-the-moment. Maybe the best insight into yesterday’s trading is that traders should be “alert but not afraid” in the current market. This probably applies equally to stocks, as well as other growth-and-risk sensitive assets. For one, commodities are demonstrating similar signs of distress at the prospect of weaker global growth due to the trade war. While growth-sensitive currencies, like the NZD and Canadian Dollar (amongst others), remain well off their highs and mired in downtrends, themselves.

Australian Dollar misses the bounce

One currency that didn’t experience much love last night was the Australian Dollar. Although it was a sea of green for riskier-currencies, and a sea-of-red for safe haven currencies, the A-Dollar barely budged during European and US trade. In fact, despite closing the session effectively unchanged, intraday price action saw the currency clock a fresh low of 0.6935. There’s more than just short-term sentiment behind this, too. The Australian data docket is full in the next couple of days; and market participants appear wary of bidding higher the A-Dollar while the prospect of an imminent RBA rate cut is so possible.

Domestic and global factors drag on AUD

The combined effects of a potentially weaker Chinese economy, as well as relatively significant domestic risks, is keeping the outlook for the Australian economy, and therefore the Australian Dollar, a little dour. As macro watchers wrangle with the potential consequences of the trade-war, local market participants will be keeping an eye on some Australian data today: the release of Wage Price Index figures this morning. Given the weak inflation environment in Australia, as well as the RBA’s continued instance its focus remains on the labour market, the wage growth numbers may well prove of high impact to market activity today, and moving forward.

Wage growth, rate cuts, and Aussie markets

As it stands, interest rate cuts from the RBA are considered a “when” and not “if” proposition. 40 to 45 basis points of cuts before year end from the RBA are priced into the market at the moment, as-a-result. While anything greater than this implied probability for cuts before year end is unlikely, a weak wage growth print could bring forward the expectation of when these cuts will occur. In such an event, the AUD/USD should continue to grind lower, in line with a continued fall in AGB yields to new-record lows, and the ASX 200 will probably receive an intraday boost.


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