Macro-drivers: US indices were generally lower, although the large-cap Dow Jones managed to register new all-time highs. European markets were held back by grief surrounding Italian fiscal sustainability, coupled with lingering concerns about the outcome of Brexit. The general sense of risk aversion led to an appreciating USD and climb in US Treasuries, pushing yields on the benchmark 10 Year Treasury note to 3.05 per cent. Oil cooled its run somewhat as commodity traders took a breather, as WTI and Brent Crude clocked gains above $US75.00 and $US85.00 per barrel, respectively. The overnight session establishes an uninspiring lead for the Asian markets in general, auguring a mixed day ahead.
ASX: SPI futures are pointing to a slight uplift in the ASX200 this morning, backing up a day which saw the Australian share market shed 0.75 per cent. There were really no winners on the day, with the only sector coming-out in the green being the energy sector. The financials couldn’t halt their sell-off, declining another 1.12 per cent yesterday, while the losses were compounded by a reversal in the price of CSL, which led the health care sector 1.36 per cent lower on the day. The breadth of gainers for the session were low again at 23.5 per cent, and volume was robust, indicating the (on balance) bearishness of this market. Momentum hasn’t shifted dramatically to the downside yet, but yesterday’s break of support at 6160, and close just above support at 6120, suggests some sluggish times ahead for Aussie shares.
RBA: The local session yesterday was bereft of truly impactful news, but of course attention was duly allocated to the afternoon’s meeting of the RBA. No surprises were what was expected, and no surprises is what traders got: there was a tip of the hat to the accuracy of the central bank’s growth forecasts of +3 per cent, a reiteration of only a gradual return of full employment and at-target inflation, and a very soft warning of how low wage growth and high private debt levels may hinder household consumption. The reaction in interest rate markets was dull, but slightly to the downside: bets of a hike from the RBA got pushed back to March 2020 as opposed to February 2020, according the ASX 30 Day Cash Futures markets.
Aussie Dollar: The Australian Dollar came-off shortly after the meeting however, slipping from about 0.7230 to plunge beneath support at 0.7200. To the naked eye it would appear a reaction to what was (perhaps) a dovish RBA, but close inspection suggests the impetus lay somewhere else. Risk currencies sold-off in tandem at around 3.00PM (AEST), as news broke out of Europe about Euro-policy makers concerns about Italian fiscal policy and the possibility of an Italian default. The spread on Italian and German 10 Year bonds widened once more (to currently trade around 300 basis points) sending the EUR to 1.1540 as funds flowed into the safe-haven USD. Naturally, the AUD suffered as a result, to presently just shy of 0.7190.
Italy and Europe: The Italian fiscal situation in looming as a major risk for the European economy. It is not getting quite as much local press as it deserves, though this is in a sense justifiable given the preoccupation with the grave implications of the US-China trade war. The crux of the issue in Europe relates to the ruling “populist” government in Italy, and its reluctance (or even refusal) to comply strictly with the Eurozone’s rules regarding sovereign budget deficits. The recent Italian budget has tested European bureaucrats’ patience, leading to a rebuke yesterday from European Commission President Jean-Claude Juncker, igniting a counter-response by key Italian “League” politician Claudio Borghi, who stated Italy could solve its problems if it controlled its own currency. The hostility swept through European bond markets, spurred a sell-off in equities and pushed the EUR well into the 1.15 handle.
Greenback: The US Dollar was the inevitable beneficiary of Europe’s woes, climbing to a 6-week high, in DXY terms, to 95.50. The trading activity is a reminder of the two-pronged benefit of long USD positions at-the-moment: the US Fed’s determination to hike interest rates is attracting yield chasers, supporting the greenback, while the litany of global risks is pushing traders intermittently into safe havens, also supporting the greenback. The upward trend has cooled for the USD of late, leading to calls that the currency could be creeping towards a top. But with US Fed Chairperson overnight talking up the “extra-ordinary” times experienced by the US economy, as well as talking down the prospect of out of control inflation caused by tight labour markets and increases in global tariffs, the underlying bullish-trade remains well justified for the greenback.
US Indices: A question raised by such bullishness from market participants and policy makers alike is, how much further can the US equity bull run last? It’s foolish to ever call tops on any market, especially one that is apparently founded on such strong fundamentals. The benchmark S&P500 and NASDAQ traded lower overnight, though both indices sit within reach of new all-time highs. The far narrower Dow Jones index, however, registered a new intraday high during the US session, climbing 0.46 per cent to close at 26773.94. A word of warning must be disclaimed with the Dow Jones as relatively high as it: though one wouldn’t want to call a marked sell-off, rallies for the Dow Jones that extend this far above the more comprehensive S&P500 often result in a pull back for the Dow Jones, as traders buy into the index in an attempt to enter-and-exit the market on the basis of rosy-sentiment.