Trade news and earnings give sentiment a lift

Sentiment boosted by earnings and trade

Fresh trade-war headlines and a couple of earnings beats bolstered sentiment on Wall Street yesterday. Risk appetite was tickled by news that US diplomats would be heading to China for the first time since May to negotiate trade. While market-fundamentalists were relieved by a solid earnings beat from corporate-giant Coca-Cola. The S&P 500 has taken both pieces of news and turned it into fuel to propel itself beyond the 3000 mark. It ends what was a rather positive, albeit low octane day in global stock markets. Stock indices throughout Europe were in excess of 1% higher, generally speaking; and Asian equities also finished broadly in the black.

Johnson wins the UK’s top-job

Perhaps the biggest headline last night, though, pertained to the long-awaited announcement of who would be the UK’s next Prime Minister. As expected, Boris Johnson took the cookies – bringing financial markets, it is feared, one step closer to a no-deal Brexit. Markets had already priced-in a Johnson victory, so the reaction in GBP, in particular, was choppy, at best. In the bigger picture for market participants, though: Johnson’s victory remains a downside risk to the Sterling. A no-deal Brexit would be an adverse outcome for the UK economy, and would likely drive necessary rate-cuts from the Bank of England, eventually, to tackle its expected slowdown.

ASX registers a Tuesday rally

The ASX 200 experienced a solid day’s trade yesterday. Volumes were below average, at -9.00%, but market-breadth was reasonably healthy, with all sectors finishing in the green. The benchmark index made another foray above the 6700 level, to trade within 0.75%, during intraday trade, of its recent 11-year highs. Information technology stocks led the market in relative terms; while, naturally, a lift in the banks contributed most the ASX 200 on an absolute basis. The market has edged to the top of its recent range now, as traders wait for fresh news to push the market sustainably higher.

ASX fundamentals lukewarm, but upward trend intact

Price action speaks of an ASX that’s consolidated, but positioned to break higher, provided the sufficient catalyst arrives. The fundamentals aren’t terribly attractive by any means: risks to earnings growth remain, and certain valuation metrics, such as the price-to-sales ratio (2.42) and price-to-book ratio (2.18) look historically high. But the market isn’t responding to growth expectations. It’s being driven by interest rate expectations. And though the price-to-earnings ratio (18.05) is elevated, it isn’t extraordinarily so. Plus, at 4.49%, the yield boosted by owning ASX200 shares, compared to other asset classes, promises to drive flow into equities, and support continued momentum chasing by investors.

ASX sentiment indicators balanced

Market internals for the ASX 200 isn’t showing an index positioned primed to run either way, yet. Momentum is certainly skewed to the upside. However, there’s little sign that a critical mass of stocks in the market are either oversold or overvalued. In fact, looking at measures of breadth and relative strength, the ASX200 is trading broadly in-line with its multi-year averages. Sentiment is the market, perhaps reassuringly, is quite warm, but not too hot. The conditions seem in place for another leg higher for the index. Once again: a catalyst for another rally looks as though it's required. Earnings season and upcoming central bank meetings will probably be the events to watch.

Europe’s PMI data the day’s highlight

Trader attention turns, beginning more-or-less today, to the health and fortunes of the Eurozone economy. The European Central Bank meeting in 24 hours’ time is going to be the highlight of the economic calendar this week. But this evening, markets will have the opportunity to frame that meeting around what’s revealed tonight in arguably the most crucial data point for the European economy right-now: continent-wide Manufacturing Purchasing Managers Index numbers. Economists’ forecasts are suggesting a slight improvement in the metric this month. However, the improvement looks as though it will be marginal, with German and European manufacturing activity likely to remain in “contraction” territory.

European economy to limp into ECB meeting

Recall: it’s been the progressive deterioration in this “forward-looking-indicator” this year that’s triggered fears about a major slowdown in the Continent’s economy. Hardly an aberration throughout the global economy at-the-moment: European manufacturing activity has been demonstrably the worst hit by the escalation in the US-China trade-war. Now the global economic slowdown seems stubbornly entrenched, this round of European Manufacturing PMI data will provide the market with the last sample of tier-1 economic data before the market prepares for Thursday’s ECB meeting. The ECB is poised to outline a fresh monetary stimulus program this week; tonight’s data will feed perceptions of how aggressive the central bank may need to be.