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Trader thoughts - the long and short of it

Share markets generally struggled consequently, keeping volumes low in the case of US markets, while boosting selling activity in Australian and Japanese equities.

Source: Bloomberg

The first day of trading for the week proved to be a news heavy one, despite what was a light economic calendar. Remarkably, much of what moved markets yesterday was new information – or at the very least, a new spin on existing stories. On the face of it, the day was perhaps a lacklustre one for investors, who appeared struck by a case of risk aversion following the events of the weekend. Share markets generally struggled consequently, keeping volumes low in the case of US markets, while boosting selling activity in Australian and Japanese equities. The day now sets up an interesting week, particularly for theSX200, which now trades practically in line with where it was at the start of last.

The PBOC surprised financial markets during the Asian session, to announce considerable stimulus measures to support the Chinese economy and its financial stability. China’s central bank increased its one-year medium term lending facility (MLF) to the tune of 502B yuan, in a move that came entirely from left-field for market participants. The decision by the PBOC is ostensibly to boost liquidity within the Chinese financial system, with the view of supporting commercial activity in a period where concerns are mounting about credit supply in the broader economy. This comes several weeks after the PBOC announced it would be relaxing capital requirements within the financial system and seems to support the notion that policymakers are parking their objective of increasing financial stability, in favour of maintaining current levels of economic growth.

The question for many is whether the Chinese actions amount to a counter strike in this trade war, or whether a more benign motive underlies them. It will certainly escalate tensions between US President Trump’s administration and the Chinese leadership, given the US President’s bellyaching about Chinese currency manipulation just last week. One possible explanation for the PBOC’s actions yesterday is that while not an act of outright aggression, pumping stimulus into the economy represents the fact that — owing to a mixture of cyclical factors, growing financial instability, and the burgeoning effects of the trade war — Chinese officials need to appear to their people and adversaries alike that they are willing to support and protect the country’s economic interests. In any event, one should expect that the PBOC’s policy intervention will only lead to further currency depreciation, which will likely lead to greater ire from US President Trump.

SPI Futures are pointing to a respectable rise in the ASX200 at the opening bell this morning of about 0.3% (at time of writing). It was an unfortunate day for Australian equity bulls, after the ASX gave up the gains it worked so hard to attain throughout last week. Support levels around 6275, 6260 and 6240 were cleared with ease, as somewhat uncharacteristically large volumes for a Monday pointed to anxiousness amongst traders to take risk and profit off-the-table. The losses were felt flat across the sector map, ranging from -0.85% losses in the IT space, to -1.23% losses in Health Care Stocks. The only very minor bright spot was an effectively flat day for the Energy sector, courtesy of a recovery in oil prices.

Wall Street has managed to perform well overnight, exceeding the expectations implied early in the day by futures markets. Volumes have remained thin in US trade, probably due to the fact most risk-off selling for North Americans occurred during the last trading session of last week. It was the financials stocks that held everything together for US indices, which has so far helped the S&P500 hold gains of around 0.2 per cent.

The 2800 level seems to hold greater gravity for the S&P, with traders reluctant to drive that index far beyond that point, even despite what has been on balance a better than expected reporting season thus far. Look to the release of company earnings from google parent Alphabet very shortly to dictate the immediate for US shares, and potentially weigh-upon or boost sentiment.

Japanese financial markets are at the centre of global volatility currently, as those markets wrestle with the full force of global and local trading themes. In terms of global factors: the rally in the Japanese Yen –  driven by safe-haven buying by currency traders amidst trade war fears – has weighed on the Nikkei, which had found its strength in a climb in the price of export related stocks in recent weeks. When it comes to the more local issues: interest rate and bond markets spiked yesterday, placing further pressure on Japanese equities, as speculation mounted that the Bank of Japan would easing its program of pushing down long-term rates. The combination of factors has proven to be an unfortunate coincidence for Japanese equities, with the Nikkei fleeing from the 23,000 mark it was eyeing only as recently as the end of last week.

In other corners of financial markets, price volatility remains high as traders seek to balance growing risk with the desire of capturing the short terms benefits of solid fundamental conditions. The dynamic was best witnessed in US Treasuries overnight, after benchmark US 10 Year Treasury yields climbed a noteworthy 7 points to trade as high 2.96% -- its highest level in over a month. While an element of this price action can be attributed to the US Federal Reserve’s planned rate hiking path, it also appears that a risk premium is being built into debt markets amidst falling confidence US President Trump’s administration. The USD rallied partly on the back of this news, to climb back above the 94.00 handle on the US Dollar Index and push the AUD/USD down to support around 0.7375.

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.

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Share markets generally struggled consequently, keeping volumes low in the case of US markets, while boosting selling activity in Australian and Japanese equities.

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