Trader's View - Headlines driving market sentiment ahead of trade-talks

Trade-headlines determining sentiment once again

Judging by last night’s price action, trade for the remainder of the week is going to very “headline driven”. It’s an obscure way of saying a little bit nervous, a little bit jumpy, and probably a bit irrational. The reason for this judgement comes from market participants’ reaction to some pretty shallow, and conflicting news-stories overnight. As most traders have become used to when it comes to the subject, trade-negotiation news drove sentiment during US trade. And unlike the night prior, where traders became hung-up on bad-news, last night’s developments proved a dead-rubber for the stock market.

Trump administration claim a deal is afoot

In another episode of “will-they-or-won’t they”, probably more befitting of a 90s sit-com plot-line rather high-stakes global diplomacy, the leaks provided to the press from the Trump Administration were rather constructive, and far less belligerent than those received at the start of the week. The conversation began with a Tweet overnight from US President Trump, announcing to the market that the Chinese delegation “are coming to the US to make a deal”. Those comments were promptly backed up by Trump advisor Sarah Sanders who announced that the administration had received word from the Chinese that they were ready to make a deal.

US equities still sell-off into the close

The news, surely by design, broke at the start of the US session, and set-off a mini-flurry of buying in Wall Street stocks. And that behaviour held for the most of US trade. However, in what’s probably a sign of a general bearishness in the market currently, the S&P 500 sold-off in the final 30-minutes of trade, dropping -0.60% from the intraday high. That sort of selling into the close is a sign of a seller’s market currently; and it backs up the view upside momentum is global equities has stalled, if not reversed, for now.

Momentum pointing to downside for stocks

Not to despair just yet, because the US equity market is pulling back from overbought levels. Nothing substantially fundamental has changed in the market yet, in the sense there’s few hard facts to suggest equities are entering another correction mode – such as those experienced a couple of times last year. Granted, the fundamentals aren’t overly strong to begin with; it’s just for now the behaviour of the marginal buyer-and-seller is driving price. Just as momentum-chasers stretched the S&P 500 after it hit new all-time highs, it’s their departure from it that is generating the pull-back being experienced.

A spike in the VIX fanning the fire

How far this wave lower will go is a difficult task to predict – no one can categorically state they know that, of course. But after a very big run-up in the US stock market this year, some further downside as the market recalibrates looks quite possible, judging by the emerging price trend. There are several other factors shifting the market about too, brought about by the surprise deterioration in US-China relations. The VIX has spiked, as the trade-developments drives an unwinding of what was historically high short positions on the volatility index – a dynamic that could exacerbate any further unwelcomed surprises in the market.

Safe-haven currencies rally; AUD battles below 70

The trade-war nervousness and the drawdown in the equity market has prompted a play into safe-haven currencies. The Japanese Yen has gotten the biggest run-on, but the USD has also strengthened, helped out by a lift in US Treasury yields overnight. That’s brought about another dip in the AUD, which looks as though its cleared-out the buyers at the 0.7000 handle – and is beginning to make itself comfortable trading with a “6” in front of it. This was despite a brief rally during Asian trade yesterday, after flows headed the Aussie’s way, from the NZD, after the RBNZ cut its cash rate.

ASX to open higher; China’s markets of interest

The lead handed to Australian markets by Wall Street has SPI Futures indicating a roughly 8-point jump at this morning’s open. Considering the S&P 500’s drop into the close, though, perhaps this doesn’t give the most reliable indicator of what sentiment ought to be on the ASX today. It’s a much lighter day on the economic calendar today than yesterday or Tuesday. One eye should be kept on what happens in Chinese markets, as traders there appear pulled between this week’s trade-war politicking, and the prospect that any escalation in the trade-war will necessitate new rounds of monetary stimulus from Chinese policymakers.