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Trader thoughts - the long and short of it

At the end of a week that may have been best described as nervous and jittery, markets closed trade in a relatively subdued fashion.

Source: Bloomberg

The news that the United States and China may re-enter trade negotiations provided the basis for the stability, but the reactions to that news were hardly ecstatic. This is justifiably so, considering investors have become very accustomed to overreacting to news that turns out to be little more than fluff. The crisis in Turkey has temporarily settled, though could easily flare again at a moment’s notice, as investors prepare for a week with a smattering of key data events, but that also includes the likely implementation of a new round of tariffs from the US and China.

Wall Street: Wall Street reclaimed some of the territories it lost throughout the trading week, led by the Dow Jones, which added a solid 0.43 per cent. This came after a mediocre day in European markets, which were generally lower for the session. Amid trade wars and emerging market chaos, many analysts have been heard imploring clients to focus on strong corporate profits to guide investment decisions. Price action in US indices supports this notion, continuing their uptrend despite the risks. The S&P 500 has inched away from clocking new all-time highs while cooling enthusiasm for US weighed on the NASDAQ; however, the Dow Jones is coming to close to approaching levels not seen since February this year, indicating a burst higher could be mounting.

ASX: SPI futures are currently pointing to a solid open for the ASX 200, a remarkably upbeat start to the week considering investors are coming off another day in which the index clocked new decade-long highs. There was a dearth of news for local investors to trade off, the effects of which could be observed in the thinner trading conditions and flat trading for some segments of the market. The element that tipped the ASX into a net positive position was the relief that the US and China would restart trade talks, and in effect was responsible for the 0.2 per cent gain for the day. If the Aussie shares can keep momentum and trade higher this morning, keep watch for 6355 as perhaps being a noteworthy resistance level.

Earnings season: It will be investor’s reactions to reporting season that will probably prove the ultimate arbiter of the Australian equity market’s strength or weakness, following a day on Friday that lacked heavy hitting company announcements. Activity will be far higher today and the rest of the week, as we enter what is probably the densest part of reporting season. In the day ahead, Woolworths jumps out as the most significant earnings report, with that company expected to show modest Net Income and Earnings Per Share growth over the last 12 months, the result of which estimated to translate into a dividend of 0.93c. Woolworth’s share price has performed reasonably well over the past year, climbing just over 9 per cent, although the momentum has shifted in the last 2 months: look for price action up to $31.30 if the today’s results surprise significantly to the upside.

Greenback: The USD has pulled back over the last few days, following a week during which the greenback smashed its way higher. The trading dynamics of searching for solid and secure yield in a safe-haven asset has diminished, resulting in funds flowing into other asset classes as risk appetite returns. The AUD/USD has possibly been one of if not the greatest beneficiary of the reduced Dollar bullishness, managing to climb back above the 0.7300 handle — and crucially through resistance 0.7310. The EUR and GBP have also come under a touch less pressure, while the Yen has maintained its strength across the board. The trend will remain on the upside for the USD for the foreseeable future, particularly if global financial stability remains a concern: look for 96.72 on the US Dollar Index as the next level of potential resistance.

US Treasuries: As sentiment and volatility potentially normalise, it may pay to keep privy of US bond markets this week. The action last week resulted in markedly lower US Treasury yields, and a much flatter bond curve. The yield on 6-month Treasuries fell by 8 points, while the spread between the 2-year and 10-year yields is currently a narrow 25 points – with the yield on the latter of the two falling to 2.86 per last week. Given this price action, it may be that not only are investors questioning the US Fed’s willingness to hike rates too steeply in a higher risk environment, but also, they possess greater anxiety about longer-term economic growth prospects, both in the US and abroad.

This week: A look to the week ahead provides the best foundations for achieving some equanimity before trading really takes-off. In global news, the next round of US and Chinese tariffs is arguably the most significant event, although the little reaction is expected in markets given the event is seemingly priced in. Central bankers have their annual retreat in Jackson Hole, Wyoming to mull over monetary policy, with the interest there in the longer-term picture of monetary policy. This will provide the backdrop for the US Federal Reserve’s Monetary Policy Minutes release, along with the release of the RBA’s own minutes from their recent meeting.

This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.

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