Relief rally moderates in global markets

Market sentiment moderating

Let’s fall back on the cliché that last night’s trade for Wall Street was a touch of profit-taking. After the several days of “relief-rallying” on Wall Street, and in global markets, price action suggests an element of moderation is occurring in risk assets. Mostly a level of psychological import, the 2900-mark proved a challenge to break for the S&P 500, with traders fading that resistance level, resulting in what was a more-or-less flat day for US equities. It caps off a 24 hours that was otherwise very bullish for global investors: from Asia to Europe, it was a sea of green for global stock indices.

Relief-rally seemingly over

What happened in US markets might well be seen as a sign that traders credulity has been sufficiently stretched. A recalibration in stock markets was afoot after Friday’s weak NFPs boosted bets of US Fed rate cuts, and the news that the US wouldn’t (yet) be slapping tariffs on Mexico. But that dynamic now has apparently worn-off, as more essential questions emerge about the state of the global economy, as well as the appetite the Fed possesses to cut interest rates. Calls are becoming louder that we are looking at a range-bound market – a prognostication that seems cogent based on current fundamentals.

Markets’ balancing act

The interesting point to note from Wall Street’s trade is various areas where the tempering of enthusiasm could be witnessed. To repeat: current market action is being driven by the balancing forces of expected monetary stimulus on the one hand, with what’s shaping-up as an imminent global economic slow down on the other. The sectoral map was probably telling of this interplay overnight: industrials and materials stocks were down, on fears about global macroeconomic activity, while consumer stocks lead the market higher on the belief that lower rates in the US will support household consumption in the US economy.

Bets of rate cuts unwound slightly

An even better measure of the prevailing market environment last night was the government bond market. As is well known, safe-haven sovereign debt has outperformed recently on the basis that central bankers would be adding short-term monetary stimulus, in response to fears about the state of long-term global growth. Though this attitude hasn’t changed, the term structure of global interest rates markets displayed some interesting behaviour in the US session: though long-term yields continued to creep lower in lower with softening global growth forecasts, shorter-term yields lifted across the board, as markets reconsidered the imminence of monetary policy support from the world’s largest central banks.

Currency action mixed

The activity in rates markets made for mixed activity in the G10 currency space. Currencies tied closely to global growth (like our AUD) generally underperformed, however that didn’t, as it normally would, lead to a concurrent lift in anti-risk currencies. The Yen was mixed, as was the Swiss Franc, the USD middling but down overall, and the Euro was a little higher – even despite a Trump-Twitter-tirade overnight about his belief the Euro is undervalued. Ultimately, the best barometer for sentiment in rates and FX markets overnight was probably gold: the yellow metal continues retrace, as relative level of negative-yielding fixed income assets continues to decrease.

The UK economy in focus

The relative out-performer in the G10 currency space in the last 24 hours was the British Pound, which rallied overnight on the release of better than expect wage-growth. The Sterling is back within the 1.27 handle now, as traders priced out the very marginal number of rate-cuts they’d had implied from the BOE this year. Though certainly a positive sign for the British economy, the fundamental outlook for the UK is still a trifle dour. Yields on long-term Gilts are trending lower, as the BOE looks increasingly backed into the corner by ongoing Brexit uncertainty, as well as the general slowing of global economic growth.

ASX should add to decade long highs today

For the mixed-lead handed to us by overseas markets, SPI Futures are indicating that the ASX 200 should add 14 points at this morning’s open. The ASX 200 had a ripping day yesterday, rallying 1.59% to a new 11-year high. Breadth was also solid at 82%, volume was well above average, and advances in high, multiple growth stocks in the healthcare sector lead the charge. It was simply a matter of playing catch-up for the Australian stock-market yesterday, which was effectively pricing in two-days of bullish news – with the question today whether the ASX will fall in-line with global markets’ general moderation in sentiment.