Risk supported on a quiet Monday, eyes turn to RBA today

A quiet start to the week

Stocks indices climbed overnight, in what was a relatively quiet day in global markets. Risk-assets reclaimed Friday’s losses, and then some, after the Trump administration quashed reports it was considering prohibiting Chinese companies from listing on US stock exchanges. Chinese PMI data was the big data release on Monday, and came in better than expected, overall. Oil prices plunged as Saudi Aramco announced its production capacity has returned to normal. Gold prices have dipped to multi-month lows, as upside momentum slows in the yellow metal. And in the day ahead: it’s all eyes on the RBA, with the central bank expected to cut rates this afternoon.

Risk-appetite returns to markets

Activity in global stock markets was light yesterday. Volumes were well below average throughout Europe and North America, as a dearth of information kept investors from moving with any meaningful conviction. The night’s trade could be considered a bounce back, for equity markets, following US President Trump’s administration’s (unconvincing) assurances it was not planning on banning Chinese companies from listing on US stock exchanges. Though the words were rather empty, the hosing-down of fears that this US-China trade-war might seep into capital markets provided the necessary positive-headlines to invite risk-taking in the stock market. That pushed stock indices roughly back in line with where they were on Friday.

China’s PMI data beats estimates

The major fundamental story for markets in the past 24-hours was China’s PMI data. On balance, it printed better than expected. All eyes were on the manufacturing component of the release, which has been the focal point this year for market participants as China’s economy has showed signs of slowing down. It beat estimates, printing at 49.8, versus the 49.6 forecast. That data inspired a touch of relief amongst market participants, as evidence grows that the decline in manufacturing activity in China could be reaching a trough. Ultimately, the sheen from the story wore off fast: the data, after all, still shows manufacturing in a state of contraction in China.

Oil prices fall as global output normalizes

As far as price is concerned, one of the larger moves in global markets came in oil prices, last night. Crude prices tumbled by over 2.5% on Monday, off-the-back-of an announcement from Saudi Aramco that it has restored output to levels in-line with what there were prior to last month’s drone attack on one of its key facilities. Supply-side concerns have practically disappeared in oil markets, with the so-called “war-premium” in its price also seemingly of negligible consequence. Crude prices are back trading now on demand-side themes, as oil traders anticipate downside for oil as global economic activity continues to slowdown.

Gold prices falling in line with fundamentals: Significant price action was also witnessed in gold overnight. The yellow metal’s price fell 1.62%, driven by a swift shift in momentum in the market. Gold seems to be falling sensibly back in line with market fundamentals, right now. Recall: gold’s rally this year has been underpinned by the scale of negative-yielding debt in global financial markets. That pool of negative yielding debt has recently shrunk, as fears regarding a slowing global economy abates, very slightly. Gold – after a period of resistance – is finally trading back in-line with this theme, suggesting that a short-term pull-back in price could be afoot.

RBA expected to cut rates today

The RBA’s meeting tops the economic calendar today. It’s overwhelmingly expected to cut interest rates today to a new record-low of 0.75%, with market pricing giving that outcome an 80% implied probability. Surveyed economists also consider a rate-cut a done deal: 20 out of the 26 are tipping one. The logic for a cut all goes back to the labour market. Last month’s poor employment data all but confirmed that more economic stimulus is required to soak-up the economy’s “spare capacity”, and drive the necessary jobs gains to support the RBA’s pursuit of its employment and price growth targets.

Markets hoping for a cut… and then some

If the RBA doesn’t cut today, market participants are betting that the RBA will certainly cut before year end. At that, markets believe that the RBA has one more cut in it after that one – but that won’t come until April or May next year. This dovish outlook is keeping the Australian Dollar under pressure. A cut today, and then some forward guidance that affirms the market’s current view on future cuts, could see the currency push further into 67-cent level, then perhaps lower. The ASX will also benefit from the delivery of a cut – especially consumer stocks, which have outperformed since the RBA began this cutting cycle.