Trader thoughts - the long and short of it

The pain in emerging markets continues to be too difficult to ignore, although it must be said that the effects of the crisis were well contained in overnight trade.

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Source: Bloomberg

There is this sneaking suspicion in markets presently, that whatever the worst outcome is for emerging markets, some of that must inevitably spill into the developed world. The issue is however, it remains to be seen how and where these signs of contagion may first show-up. Now of course it may not do so at all, but as the scope of the emerging market crisis is uncovered, the willingness to take the risk that it won’t spread to major financial markets is waning.

Against this back drop did the overnight session unfold, which showed the signs of the cautiousness pervading markets. Across global equity indices, the losses associated with the emerging market crisis (not to mention the trade war) persisted, with European indices all dropping more than 1 per cent; while their US counterparts also dipped, though were again less affected, demonstrating that region’s fundamental strength. The Nasdaq tumbled over 1 per cent, but that was due to scrutiny on the tech sector from a US Senate Intelligence Committee hearing about social media and foreign influence on US elections. This backed up another day of dismal activity in Asian markets, which saw the CSI300 lead the region lower, down nearly 2 per cent.

What is somewhat of a curiosity against the backdrop of diminished risk appetite is that there hasn’t been a huge pay into safe havens. Indeed, a degree of this has occurred, but not to the extent witnessed over the past several months when geopolitical and global financial risks have emerged. US Treasuries have best demonstrate this, with the yield on benchmark US 10 Year Treasuries floating 1-point higher to 2.90 per cent. In addition to that, the spread between that asset and its 2-year counterpart has widened, which often reflects an increased confidence about the medium-term prospects of an economy and financial markets.

Hence, the activity in havens and currency markets more broadly may provide the insight into how to assess the emerging market crises and its effect on global equities. The US Dollar has perhaps benefitted from the yield play, but it hasn’t sky rocketed like was witness post the Turkey crisis. Moreover, the JPY, normally the chosen risk-off asset for traders, has fallen against the greenback, to trade at around 111.50. The GBP and EUR have lifted, saving the sterling from its struggles around the 1.28 handle, but that can be more attributed to improving relations between the UK and Europe. Ultimately, maybe the incongruent behaviour is equities, bond and currency markets reflect only a temporary withdrawal from equities while the emerging market problems are better understood.

The notion that the sell-off in global equities is transient and not structural will come as little consolation to ASX 200 bears. SPI futures are indicating a drop of another 11 points at the open this morning, backing-up a day in which the market shed over 1 per cent. On a technical basis, the close yesterday below what was a relatively strong area of support around 6240 should be considered a concern. This opens room for further selling deeper into the 6200s, with 6220 being the next rung down from here. Given that yesterday’s losses were led by a 2 per cent fall in the materials sector, and that commodity prices collectively fell by around 0.5 per cent last night, a test of these levels on balance looks possible.

Amid the sell-off in the ASX 200 yesterday, the ABS released GDP figures for the June quarter, which smashed expectations out of the park. In a total reversal of the prevailing sentiment following a few weeks of weak data, the growth rate for the Australian economy was shown to have climbed to 3.4 per cent, exceeding even the RBA’s generally optimistic forecasts. The result places the Australian economy near the top of the OECD in terms of economic growth and comes even despite numerous domestic and global headwinds. While local traders effectively ignored the news – although AUD did temporarily bounce back around the 0.7200 – the growth figures do reassure investors that conditions are generally strong from a fundamental standpoint.

One area of yesterday’s GDP data that placed a dampener on the overall release, and caused a point of contention for market participants, was the revelation that the savings ratio has dipped to its lowest level since before the global financial crisis. The sluggish wages growth in the Australian economy explains this dynamic, as Australians on aggregate try to maintain their quality of living in the absence of pay rises by eating into savings to fund it. It is possibly this news, and its implications for already stretched consumption in the Australian economy, that kept a lid on interest rate traders bullishness, with interest rate hike expectations ticking up only very marginally yesterday.

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This information has been prepared by IG, a trading name of IG Markets Limited and IG Markets South Africa 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. International accounts are offered by IG Markets Limited in the UK (FCA Number 195355), a juristic representative of IG Markets South Africa Limited (FSP No 41393). South African residents are required to obtain the necessary tax clearance certificates in line with their foreign investment allowance and may not use credit or debit cards to fund their international account.

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