Goodwill and cheap money boosts risk appetite

Good will and cheap money

Last night’s trade was all about good will and cheap money. And it’s given market sentiment another small boost. Firstly, the slightly greater optimism about the outlook for the trade-war took hold, as US President Trump announced a small delay in the implementation of the next round of tariffs on Chinese imports. Secondly, investors became a little giddy about the prospect of a new era of cheap money, after the ECB cut interest rates and announced a re-start to its Quantitative Easing program. So: stock markets rallied again last night; and SPI Futures are pointing to a 24-point jump at the open for the ASX 200.

US and China playing nice

The ball got rolling during Asian trade yesterday, when US President Donald Trump announced that, out of respect for China’s upcoming celebrations on October 1 of the 70th Anniversary of the People’s Republic of China, he’s pushing back the next round of tariffs by two-weeks. It’s an “act of goodwill”, Trump stated. And one that was promptly matched by the Chinese, who announced they’d be revising the current list of US agricultural imports currently covered by tariffs. Markets are hoping that this exchange means the US and China are preparing to play nice with one another, ahead of key trade-talks in October.

Few truly believe trade resolution is in sight

There was also news overnight that an “interim trade-deal” might be on the cusp of being announced between the US and China, but this news was pretty quickly quashed. In reality, it’s a hard to argue that anyone truly believes a meaningful trade breakthrough is on the cards. Market participants are just playing trade-war headline bingo, speculating on expected market reactions to trade war news rather than any meaningful change in the fundamentals. But that doesn’t mean there isn’t upside to be seen out of the reduced trade war uncertainty – especially as lower volatility sees a return to money chasing yield in the stock market.

ECB cuts rates and dusts off printing press

And that flow of money into the stock market got slightly stronger overnight. The ECB met and cut rates as expected – but also pleasantly surprised investors by announcing the re-starting of its QE program. Eurozone interest rates have been lowered from -0.40%, to -0.50%. And 20 Billion euros worth of QE will begin again, with no end date announced. Measures to cushion the impact of these measures on European Banks were also announced. The policies look like they’ll remain in place, practically, indefinitely, too, with ECB President Mario Draghi stating that the ECB will only change policy once its inflation target is “robustly” met.

Draghi’s last act of “whatever it takes”

Super Mario Draghi, it would seem, is “doing whatever it takes” one last time to keep the Eurozone economy alive, before he hands over the reins of the ECB Presidency to Christine Lagarde in the coming months. It’s perhaps a controversial move: there’s been a high level of dissent within Europe about the need and efficacy of QE. Market participants are acting with caution, too. Despite the announcement of easier monetary policy, bond yields have torn higher last night. While the Euro and short-term interest rates have also climbed. Markets are perhaps assuming that the ECB won’t be quite this dovish again in future.

US CPI comes in hot, complicates matters for Fed

The other curly news story in markets last night was US CPI data, which came out stronger than expected. The key core CPI figure printed at 2.4%, versus a forecast figure of 2.3%. It shows that price growth in the US economy is running a little hot right now. It hasn’t shifted Fed rate cut expectations much. A cut is still expected next week. However, if inflation does keep ticking higher, especially as tariffs start flowing through prices in the US economy, it could make the Fed’s efforts to cut rates deeper in future a little more challenging.

US Retail Sales the highlight tonight

This core issue will also frame tonight’s key data release: US Retail Sales data. Despite all the doomsaying about the US economy right – some of which is surely justified – the US consumer has shown remarkable resilience. In fact, it’s what market-bulls, and even the Fed, points to as reason to believe the US economy remains in a strong-enough state. A counter to this: the US consumer is normally the last domino to fall when a meaningful slowdown in the US economy takes hold. And that’s what the market is watching for in US Retail Sales: that final sign that this US business cycle is at its effective end.