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Time to give thanks
Perhaps it’s something the bulls can be thankful for; the holiday has resulted in very thin volumes across the globe, giving a subsequent ability to take pause from the unfolding market rout. There is so much information awaiting market participants coming into the end of November and start of December, so surely the opportunity to distract oneself for now by gorging on roast turkey and a few beverages of choice is being welcomed by our American cousins. Presumably, little can fix for too long the underlying anxiety caused by the myriad of fundamental concerns plaguing investors. But that’s next week’s problemor now, better that we take stock while the American punters sift around for reasons to give thanks.
To capture a theme from last night’s trade: it was – for all intents and purposes – about Brexit. Before delving into that one, let’s take a check on the price action. European equities were down across the board. The volumes for the continent were, as has been touched on, remarkably thin, except for the FTSE 100, which was down 1.28 per cent on the unfolding Brexit drama. The DAX clocked in a loss of 0.94 per cent for the day, unable to grasp the lead from the Asian region’s mixed but respectable trading day, which saw the Nikkei 225 up 0.65 per cent and the Hang Seng up 0.18 per cent, but the CSI300 down 0.37 per cent. In our local session, the ASX 200 was another index that bucked the trend of low activity, continuing its bounce off support around 5600 to close 0.86 per cent higher on volumes 10 per cent above the 100-day average.
Bonds, currencies and commodities
The US dollar was weaker, largely due to the bidding higher of the pound and EUR, with those currencies leaping above 1.28 and 1.14, respectively. The weaker dollar also supported gold, which is trading back at $1227 per ounce. US Treasuries are flat due to the Thanksgiving holiday: the yield on the US 10-Year note is 3.06 per cent. Dulled risk appetite has meant the yen is modestly stronger, trading just below 113 at time of writing; and the Australian dollar is off a touch, trading slightly above 0.7250, in tandem with the New Zealand dollar, which is just holding onto the 0.6800 handle. Oil prices have dipped again, falling about 1.4 per cent, dragging the Canadian dollar with it; while copper is a little higher for the day.
Back to the pressing issues at hand, and the lack of data combined with closed US markets has meant Brexit developments have taken centre stage. In what's been judged a positive step forward by markets, Donald Tusk, President of the European Council, announced overnight that a draft Brexit proposal had been 'agreed at a negotiators level and agreed in principle at a political level' among European Union leaders. The news is what sent the pound on a tear - and the FTSE 100 lower consequently - following yields on UK gilts, which of course rallied courtesy of the optimism engendered by the announcement. The stage is now set for this weekend's EU economic summit, where it's now very much assumed European leaders will rubber-stamp the Brexit proposal.
What are the chances?
For all the hope that a Brexit deal can be reached, the stark reality is that UK Prime Minister Theresa May faces an uphill battle. In what must have been a gruelling three hours or so in front of the House of Commons, the Prime Minister delivered a speech and then fielded questions from parliamentarians on the Brexit proposal. There is such division and disparity in the British Parliament about what Brexit ought to look like, that the likelihood any proposal could unite the very many different and opposing interests appears slim. A no-deal 'hard Brexit' remains the probable outcome, spelling trouble for UK and European markets – especially the pound. How low the cable could go in this event is difficult to predict: recent lows around 1.2750 would just be the beginning – perhaps the January 2017 low of 1.1990 could be considered the bottom of the range.
Bringing it back home, now: SPI futures are presently indicating the ASX 200 will open 29 points lower this morning. It would be awfully surprising if volumes on the Australian share market bucked the trend today and were anywhere near average. A rudderless market may emerge, whereby trade is choppy, momentum low and price action contained – particularly after yesterday’s relief rally, that added to the bounce by the index off recent lows around 5600. The fortunes of the ASX going forward will inevitably be tied to the themes that emerge from US markets, and as it stands that strongly implies further difficulty for Australian shares. However, the silver lining investors and the bulls may wish to cling onto is the notion that our share market was nowhere near as elevated as that of the US’s, so falls from here may not be as steep.
ASX: the bigger picture
Once more: that 5600 mark is significant. It amounts to the bottom of a range that was established in 2017 and held steady several months, in what might now be safely described as the markets 'accumulation phase'. From the end of that phase in October 2017 to now has seen the registering of a new decade-long high, then – in recent months – a strong correction of that move. It suggests a medium-term cycle has been completed, and a bearish impulse has now seized control of the market. The strength of that move ought to be watched for, but the broader global economic slow-down and the peak in the US market suggests a follow through 5600 is highly possible moving into 2019. The broader, secular bullish trend provides the trading channel to work within and judge the bigger picture, with the 5375 level representing the bottom of this trend channel.