ECB disappoints, taking the wind out of stocks

Stocks drop and bond yields lift as ECB disappoints

Stocks dipped in Europe and the US, while bond yields edged higher, after the European Central Bank refrained from cutting interest rates overnight, but stated the economic outlook is looking “worse and worse”. The general bearishness in markets came despite a night of slightly better than expected US corporate earnings: one of the market’s favoured bellwether companies, 3M, beat forecasts, and marginally allayed some concern about the trade war’s impact on the industrials sector. Alphabet also bears analyst’s expectations, while Amazon missed. Ultimately, though, as it so often is, sentiment was driven by central bank speculation and rates markets overnight. The ECB, this time, didn’t come with the goods and that took the wind out of risk sentiment.

ECB more conservative than expected; cuts still coming

The ECB meeting was always going to be the focus last night, and though Mario Draghi and his team did ostensibly disappoint the market by not easing policy, and by adopting quite a dour tone, the market’s reaction was probably more indicative of quirky market dynamics. After all, although the balance of opinion was that the central bank would remain on hold last night, there were bets in the market that they’d jump-the-gun and cut rates. So: the lift in European bond yields, the slightly stronger Euro and the sell-off in global stocks was more a reflection of markets recalibrating, with pricing still suggesting two rate-cuts from the ECB by early next year.

ASX continues to trek higher

Activity within the Australian financial markets yesterday was characterized by an overarching bullishness. Wall Street’s lead, combined with a fall in global bond yields, drove gains right out of the gate. While a speech delivered by RBA Governor Phillip Lowe during local trade, in which the Governor suggested “it’s reasonable to expect an ‘extended period’ of low rates’, supported the ASX 200’s push above the psychological resistance-level of 6800 – and to within 50 points of all-time highs. It was a day of broad-based gains and high conviction buying, too: breadth was above 70%, and volume was 8% above the 100-day average.

Miners get slugged by falling iron ore

The materials sector was, once again, the sole laggard yesterday. In fact, it tumbled, led by a marked-sell off in the likes of BHP, Rio Tinto, and Fortescue Metals. In essence: the reason for the sell-down in mining shares is due to the growing calls by market-analysts that iron ore prices have hit their highs – and are poised to begin a new trend lower. The change in outlook came following news this week that Brazilian miner Vale has been granted permission to reactivate one of its key mines – which promises to put an end to the iron ore undersupply that has driven market prices higher so far this year.

Aussie Dollar retraces recent rally

A combination of falling iron ore prices, and more significantly, RBA Governor Lowe’s commentary has led to a fresh-leg lower in the Australian Dollar. Expectations for RBA interest rate cuts were increased and brought forward, driving a renewed drop in Australian bond yields. The 10 Year not in particular fell to as low as 1.23% during local trade – below the RBA’s current cash rate, and to a new record low. Interest rate markets are now pricing in a 100% implied probability that the RBA will cut next in October. That has spurred a fresh leg lower in the AUD/USD, which is journeying once more through the 69-cent mark.

US growth caps-off the week

The week concludes with a health check on the US economy tonight. And overall, the results aren’t expected to be overly positive. Quarter-on-quarter growth is forecast to have slowed-down to 1.8%; down from 3.1%. It’s no great cause for panic, this growing sluggishness in the US economy. But it does re-affirm the position the US economic cycle is presently-in, and gives a clear enough reason for why the Federal Reserve is getting a little nervous about current interest rate settings. In-the-end, the trend, if forward looking indicators remain an accurate guide, is pointing towards a gradual slowdown in US economic growth.

Markets prepare for a Fed rate cut

Broadly speaking, it’s on this basis that the market has priced-in four interest rate cuts from the US Federal Reserve over the course of the next 12 months. The easing cycle is more-or-less scheduled for commencement next week, whereby markets expect that the Fed will cut interest rates, for the first time in over-a-decade, by 25-basis-points. There remains priced marginally into markets the possibility the Fed could move by 50-basis-points, too. However, as the Fed entered its black-out period this week, the chances of that outcome have diminished, with the market settling on a view that the first move by the Fed will be sold as an initial “insurance cut”.