Sense returns to markets, but bearishness still lingers

Investors gather their senses

Some of the steam in the past week’s stock market sell-off evaporated on Wall Street last night. Fear and uncertainty has subsided slightly, and that’s manifested in a bounce in US share indices. The same can’t quite be said for European and Asian equity markets, which sustained reasonably heavy losses during their respective sessions. But nevertheless, fear is tangibly lower, with the VIX falling back from a 25 reading to a 19 reading this morning. The relative calm can be chalked-up, likely, to two factors. The first, the superficial: China tapped the breaks on their bellicose-language yesterday. The second, internal market dynamics: anticipatory panic-selling has eased, as investors gather their senses.

Markets still fretting about growth

On the surface of things, a day of high activity buying of US stocks looks encouraging. A balanced view on markets, however, suggests that though there’s been a return of rationality, the overarching sentiment is still bearish. This could be a “dead-cat-bounce”. A less enthusiastic lift in bond yields, flatness in growth currencies like the AUD and climb in the safe-haven Yen and Swiss Franc, and still wide credit spreads betrays this fact. Even more pertinently, commodity futures contracts are still showing signs of concern for global-growth: oil is in a technical bear market, copper is off again, while gold remains at 6-year highs.

“Currency manipulator”

The trade-war took another ugly turn early in Asia trade, yesterday morning. The nervously awaited, official response from the US Government to Monday’s active depreciation of the Chinese Yuan by the PBOC arrived, with the US Treasury labelling China a “currency manipulator”. The trade-war is inching closer to becoming a currency war, as markets presume the US Government’s announced position sets the foundation for the Treasury to intervene in currency markets, itself. The move prompted a further rush to safe-haven currencies, and away from the USD, with the JPY, Swiss Franc and EUR all gaining off the back of that news.

China playing with fire

Nerves were soothed somewhat by the PBOC’s Yuan fixing yesterday. Although the Yuan was fixed weaker than on Monday – at roughly 6.96, up from 6.92– it was a little stronger than the 6.98 mark estimated. The act reassured markets that Chinese policymakers wouldn’t entirely let go of the reins on the Yuan, in its efforts to provoke US President Donald Trump’s administration. It does raise a risk in and of itself, however: China could be playing with fire here. Can policymakers manipulate the Yuan’s value, and retaliate to US tariffs threats, while also ensuring it doesn’t lose control of the currency and incite financial market instability?

RBA holds, downgrades growth and inflation outlook

The RBA did what it was expected to and kept interest rates on hold yesterday. Coming into the event, another cut from the central bank was considered a less than 10% chance. The interest, as it always is when the decision is all but assured in advance, was in the guidance. And while trying to keep a cautiously optimistic tone in its communications, the RBA kept the door wide open for another interest rate cut. Acknowledging that spare capacity, and subsequent sluggish price pressures, remain in the local economy, the RBA stated it would “ease monetary policy further if needed” to ensure these maladies are remedied in time.

RBA did little to cut through noise; but October cut still the word

The consequence of this clearly dovish tilt didn’t quite have the impact it normally would, given the market’s preoccupation with trade-developments in the past two-days. The Aussie Dollar had already popped higher on the back of the Yuan-fixing news prior to the meeting (though remains mire near its decade-lows); while there was little that could have pulled the ASX out of the doldrums yesterday, with the benchmark ASX 200 shedding nearly 2-and-a-half per cent. Nevertheless, easier monetary policy in Australia is still firmly on the cards going forward: the next rate cut from the RBA is baked in for October, with September now a fifty-fifty proposition.

RBNZ meets today, expected to cut rates

The board of the RBNZ meet today, with markets pricing-in a 100% probability that it will cut interest rates to a new record low of 1.25%. The move will come despite what is, at present, not such a terrible outlook for New Zealand’s economy. GDP growth is only slightly below trend, and inflation is only just below target; while the labour market, as revealed by yesterday’s jobs figures, is quite robust, with the unemployment-rate at a 10-year low at 3.9%. Today’s expected RBNZ cut, it seems, is another example of a central bank taking pre-emptive action against a looming economic slowdown.