Stocks pull back, bond yields fall, as markets position for business end of the week

Global equities retraced some of the week’s gains, as bond markets rallied once again, and a small play out of riskier assets occurred, last night.

Source: Bloomberg

A pullback without the panic

Global equities retraced some of the week’s gains, as bond markets rallied once again, and a small play out of riskier assets occurred, last night. Although the VIX did edge higher, this wasn’t one of those panic-stricken days market participants have become accustomed to in the past month. Volumes were very low, especially compared to what’s been experienced during the other intra-day sell-offs in stock markets recently. Instead, this sell-off possessed the hallmarks of a market “pre-positioning” for a handful of high-impact events in the next day-or-so. Ultimately, the fundamentals haven’t changed yet – but last night’s pullback in stocks shouldn’t be read as that they’ve become any worse.

The bears hold control still, as data comes into focus

The fact momentum alone couldn’t sustain the run higher in European and North American stock markets probably speaks of a persisting bearishness right now. Despite some terrific intra-day rallies in equities, there isn’t a categorical cue (yet) that risk sentiment has recovered. Markets are still worried about the global economy and earnings downgrades, and the bets are that central bankers will pull out all stops to fix this problem. That dynamic is keeping pressure on yields, and capping stock market gains. The market does enter the business end of the week now. Focus will be narrowed on a raft of central bank news, and tier-1 economic data.

RBA highlighted the data docket yesterday

In the day’s local economic highlight yesterday, the RBA released the minutes from its August meeting. Though certainly containing some interesting insight about the drivers of global economic activity, as well as the likely monetary policy response, market participants found little new, market-moving ¬information within the document. Rates markets and the AUD barely budged on the release, as traders remain preoccupied with global macro-economic news. As it presently stands, the market is still betting that the RBA cuts interest rates twice in the next 6 months, or so. The first, to likely come in October; the second, likely in January next year.

RBA sees economic risks skewed to downside

Judging by the RBA’s minutes, though, and it appears the central bank sees risks skewed to the downside, for now. Echoing a message being delivered by several of the world’s largest central bankers currently, “trade and technology” disputes between the US and China is weighing on business investment across the globe, and slowing down economic activity. Global growth is still expected to be positive in the period ahead. However, any further escalation in the trade-war would, according to the RBA, add to the downside pressures to the global economy, and probably necessitate more aggressive monetary policy easing.

The thing keeping central bankers up at night

Therein lies the central dilemma for policy makers across the world right now. Labour markets are tight and consumption, on the aggregate, is fairly strong. But weaker business investment could skittle these things, and catalyse a drop-off in employment, and consumer activity down the line. Central bankers are going to cut rates, and cut rates hard in attempt to stoke business investment and continue to drive employment and consumption. But what if, because of the uncertainty brought about by the trade-war, businesses don’t invest? That’s the issue likely keeping central bankers up at night – and could be the difference between economic slowdown, and recovery.

FOMC Minutes to highlight today’s trade

The minutes for the FOMC’s August meeting highlights the data docket today. The Fed cut rates at that meeting, but as is reasonably well known, completely fumbled (again) its communications to the market about the likely trajectory for US interest rates. US Fed Chair Jerome Powell suggested, on the one hand, that the Fed’s last cut was simply a “risk management cut”; while on the other hand, stated the Fed’s intention to “act as appropriate” to continue the US economic expansion. The subsequent confusion has underpinned a lot of the volatility experienced in financial markets recently, as investors question the Fed’s will to support the US economy.

The next possible cause of volatility

This ‘Will they? Won’t they?’ dynamic is sowing seeds of potential market-volatility. Of course, the market understands not much new information can come from the FOMC’s actual minutes. The Fed’s annual meeting at Jackson Hole this weekend, and the messaging from there, may therefore be of greater import. Irrespective, the risk is this: markets are betting big that the Fed will be cutting interest rates aggressively in the 12 months to tackle an expected slowdown in the US economy. If they fail again to deliver the forward guidance this week to back up this perception, stock markets could be in for another major shake-up.


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.

Seize a share opportunity today

Go long or short on thousands of international stocks.

  • Increase your market exposure with leverage
  • Get spreads from just 0.1% on major global shares
  • Trade CFDs straight into order books with direct market access

See opportunity on a stock?

Don’t miss your chance. Try a risk-free trade in your demo account, and find out whether your hunch could have paid off.

  • Log in to your demo
  • Try a risk-free trade
  • See whether your hunch pays off

See opportunity on a stock?

Don’t miss your chance. Upgrade to a live account to take advantage.

  • Trade a wide range of popular global stocks
  • Analyse and deal seamlessly on fast, intuitive charts
  • See and react to breaking news in-platform, when it matters

See opportunity on a stock?

Don’t miss your chance. Log in to take advantage while conditions prevail.

Live prices on most popular markets

  • Forex
  • Shares
  • Indices
Bid
Offer
-
-
-
-
-
-
-
-
-
-
Bid
Offer
Bid
Offer
-
-
China 300
-
-

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

Plan your trading week

Get the week’s market-moving news sent directly to your inbox every Sunday. The Week Ahead gives you a full calendar of upcoming economic events, as well as commentary from our expert analysts on the key markets 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 spread betting and CFDs.

Stay on top of upcoming market-moving events with our customisable economic calendar.

Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 74% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work, and whether you can afford to take the high risk of losing your money. Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage.