Trader thoughts - the long and short of it

The weak lead from Wall Street combined with US Labor Day holiday kept trading within financial markets soft and subdued overnight.

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Source: Bloomberg

The return of trade war concerns following the disintegration of talks between the US and Canada weighed heavily on markets in the Asian region, with the Nikkei, Hang Seng and the major Chinese indices sustaining considerable losses. It places traders in a starkly different position compared to last week when it was hope that perhaps US President Trump and his administration had turned a corner with their views on global trade. As has proven the case time and time again however, clarity, stability and consistency on any topic can’t be expected out of this White House.

Chinese markets are still looking immensely vulnerable, particularly in the equities space, which can’t seem to hold onto any gains for more than a few days at a time. Some have called the bottom of the Chinese equity rout, however when checking the charts, the trend for the blue chip CSI300 (for one) is still firmly lower. On that index, around 3400 has so far proven the level to sell rallies, but the point of concern for China-bulls is that sell-offs are occurring at gradually lower highs. Financial stability is less of a concern for Chinese markets at this stage, owing to the PBOC’s stabilization measures of the Yuan at around 6.80. It appears though that Chinese indices will ignore all good news until a firm outcome is realized from the US-China trade war.

SPI futures are pointing to a flat-to-lower start to the day, indicating a 2-point drop at the open. Despite the weakness in the Asian region during yesterday’s light trading session, the ASX 200 was able to hold up reasonably well. In no small part the latest tumble in the Australian Dollar supported this, with much of the index’s gains this year attributable to the falls in the local unit. After battling around the day’s open for much of the session, the ASX200 gave up its little struggle to close the day 0.1 per cent lower at 6310. Simply, it was the banks and materials stocks that dragged upon the index, with the latter coming under pressure from a dip commodity prices following the weekend’s trade war escalations.

However, even in the face of a spate of poor economic data, investment conditions in Australian are being assessed favourably. The knowledge that the RBA will likely remain supportive of the economy helps undoubtedly, as interest rate markets price in less than one rate hike before March 2020. The effects of this pricing have impacted local fixed income markets, particularly on Commonwealth Government bonds falling dramatically: yields on 2-year and 3-year Australian government debt now stand at 1.95 per cent each, indicating markets don’t believe in any more than 2 interest rate hikes from the RBA before mid-2021.

This dynamic establishes an interesting narrative going into today’s RBA meeting, at which the central bank won’t hike interest rates once again. Market participants will be looking at the RBA’s accompanying statement today, probably in search of insights relating to the property market, the health of Aussie households and the risks the economy faces from geopolitical crises. However little new information outside the cut-and-paste analysis from the RBA will be forthcoming, as the central bank looks to soothe concerns and avoid exacerbating already rattled investor’s nervousness

Regarding weak economic data, the ABS released Retail Sales figures yesterday, confirming market worries that consumer activity in the domestic economy is slowing down. Australian households are doing it tougher of late, as they begin to feel the pinch of a private debt binge, low wages growth, falling property prices, and what appears at present to be the beginning of higher borrowing costs. Traders are quickly adopting the belief that these variables will conspire to weaken aggregate demand in the Australian economy, the result of which will steady interest rates for some time into the future. The AUD has suffered for the last several weeks as this view sets into trade psychology, with the commentary now revolving around how quickly the AUD/USD could fall below 0.7000.

That is (of course) not to say that the fortunes of the Australian Dollar will be dictated by purely domestic factors. On the contrary, it will remain the case that US President Trump’s trade war, the deteriorating state of emerging market economies and geopolitical issues in Europe will hold greater baring on the Aussie’s fortunes. It is because the USD is playing such a significant haven roll for markets in the face of these risks that the Aussie Dollar remains so vulnerable to the downside, with a blow-up in any of these risks likely to kick the currency down below 0.7160. It’s difficult to imagine that given the heightening risks and the volatility already witnessed in recent months, that we won’t see this situation unfold. It may thus be a matter of when – and not if – this situation arises; with this week presenting a prime set of circumstances given the probable escalation of the US-China trade war.

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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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