Trader's View - Tech troubles lead stocks lower

Global equities maintain their slide

Global stocks have pushed lower once again, mostly thanks to the latest trade-war salvo. The result was a tumble for the European indices, and another down-day for Wall Street. Of the majors: the Eurostoxx 50 shed over 1.6%, as did the DAX; the FTSE 100 crimped another 0.5 per cent; and the S&P 500, as the key bellwether, shed over 0.6%. It’s beginning to look like a market that is increasingly willing to fade rallies in stocks, given the uncertainty of the trade-war – with a key pivot point for the S&P 500 emerging at a zone of support levels around the 2800-mark.

Tensions rising around global-tech

The nasty development in the trade-war yesterday pertained to new and tighter sanctions from the White House on Huawei. To cast one’s mind back: the biggest jitters when the trade-war commenced last year came when global-tech firms appeared vulnerable to either US or Chinese trade-barriers. Interfering in the technology industry was considered a bold and disruptive play then – especially to the supply chains of some of the globe’s biggest tech-companies. As a consequence, embroiling tech firms in the trade-war was considered high impact and high stakes, and was approached carefully at the time – even by the bombastic US President Donald Trump.

The reason behind targeting tech

It’s becoming clearer now the US and Chinese technology firms are becoming the central focus, at least for now, in the trade-war. And it makes sense, if the trade-war is examined through the proper lens: this conflict is about the US protecting its international supremacy moving into the future. China’s ambitions are to transform itself into the world’s great technological powerhouse – mostly as a means of securing its strategic interests. This is a clear threat to US hegemony, at least in the eyes of the US government, and needs to be contained to ensure China grows within the parameters of a US-led global order.

NASDAQ leading the losses

So as a result of this dynamic, global tech shares are beginning to enter a patch of turbulence. The fear manifested primarily in the NASDAQ, which lost over 1.4 per cent in overnight trade. It’s a concerning signal for the broader market, too: over half the
S&P 500’s overnight loss was attributable to a fall in the tech-sector. Though valuations are nowhere near as stretched as they were last year, chasing growth in the current market is apparently becoming less-and-less appealing. With trade-war concerns looming as a spectre over the global economy, further softness in equity markets ought to be expected, should this theme in global tech continue.

Don’t forget about the Fed, too

Of course, there’s another side to the argument that stoked small concerns for the US stock market overnight. US Federal Reserve Vice-Chair Richard Clarida spoke last night, and poured some cold-water on the notion that the Fed will cut interest rates this year. Keeping in mind that the primary driver of Wall Street’s strength this year has been attributable to shifting monetary policy settings, rather true earnings growth, Clarida’s comments prompted a marginal reshuffling in US interest rate expectations. The result was a slight lift in US bond yields, which came even in light of last night’s “risk-off” activity in equity markets.

ASX soars thanks to the banks

The overnight lead has SPI Futures indicating a 41-point drop for the ASX 200 this morning, backing up a day of extraordinary activity om the ASX. On balance, market participants seemed rather pleased with the Coalition’s surprise election victory on Saturday. Though most of the market behaved in such a way that betrayed the more general fears clouding global equities, the heavily weighted financial sector soared on relief that the Labor Party’s expansive negative gearing, capital gains tax and franking credit reforms would not be forthcoming. The result was a 1.74% gain for the ASX 200 and a new 11-year high.

Local trade to turn back to economic fundamentals

Attention will shift to matters of more fundamental concern today. The RBA’s monetary policy minutes are released, with market participants to remain acutely focused on potentially changes in language from the central bank. A rate cut, after all, is simply considered a matter of time for financial markets. Two rate cuts from the RBA are priced into the market by year end, so the core concern for traders is when the first cut arrives. The RBA has remained (almost overly) upbeat in their assessment of the Australian economy; a marked change to this tone could increase bets that a rate cut will occur next month.