A mixed day for stocks, as Brexit fails to move forward

Sentiment lukewarm as risk heats up

Ahead of a risk-heavy day, global equities find themselves in a mixed position. The VIX is flat, so traders aren’t any more fearful than at any point in the last month-or-so. Overall, the market is demonstrating resilience, judging the overnight session alone. European stocks experienced a day in the green, following on from a mixed day in Asia. As Wall Street enters its penultimate hour at time of writing, it will apparently clock in a mixed day itself. Better than expected results from industrial giant 3M has eased concerns about the trade-war’s impact on US corporate profits. However, Apple Inc. reports after the bell, and following the turmoil that company created in markets earlier in the month, market sentiment hinges in a far greater way on the outcome of that event.

Price action mixed in markets

Looking at price action across asset classes, and this mixed sentiment reveals itself. US Treasury yields have fallen with the US Dollar in anticipation of the meeting of the US Federal Reserve. The EUR is steady consequently, but the Yen is naturally a (modest) outperformer. Gold has pushed further above resistance at the $US1300 handle and looks primed for a bit of upside; and oil is higher, in part on hopes for stronger global growth, but primarily due to the potential of US sanctions on Venezuela. The Pound is down and looks poised to swing as votes are cast in the House of Commons on a series of Brexit-amendments. Finally, the Yuan is still edging higher despite news the US is proceeding with charges against Huawei and its CFO, Meng Wanzhou.

A focus on Australia

Let’s take a focus on Australian issues for a moment. The big risk events this morning is unfolding a little later-on – Brexit MP’s are staging their Brexit-amendments votes, the result of which will not be known until very close to the end of the US session, which adds a dollop more instability around the time when Apple reports. The more significant global macro-events aside, a keen interest should be directed to the fortunes of Australian markets and the economy today, if not for the rest of week. Even as the outlook for trade negotiations improves, and global equities hold onto their rally, storm clouds are apparently brewing for Australia’s economic fortunes, following several Aussie-negative stories yesterday, and ahead of this morning’s massive domestic CPI release.

Local business conditions deteriorate

The current performance of the ASX wouldn’t give it away, but the growth outlook for the Australian economy is becoming dimmer. NAB Business Confidence data was released yesterday, and although the headline “confidence” number hit-expectations, the data showed a marked (and concerning) deterioration in business conditions – the worst since the GFC in fact. The data-point isn’t normally a significant market-mover, but so poor were the figures yesterday, traders were forced to pay attention. The Australian Dollar fell 30 points to test 0.7140 once again, and Australian Commonwealth Government Bonds rallied, as markets priced in the increased possibility that the RBA will have to cut interest rates at some point in 2019.

CPI data and the RBA

Implied probabilities of a rate cut from the RBA in 2019 has climbed roughly to 40%. This point becomes a matter of interest today, due to the release of local CPI data at 11.30 this morning. Forecasts are for a 0.4% rise in quarter-on-quarter price growth, translating into an annualized figure of about 1.7%. If realized, the data will suggest an RBA that is stuck with rates on hold at 1.5% for the foreseeable future, and vulnerable to shocks to the overall economy. Given the deterioration in the housing market, and the still-weakening position of Australian consumers, sustained low inflation stacks the cards gradually against the RBA’s bid to move rates higher – especially if the strong labour market begins to falter.

ASX 200 trading sideways

Australian equities won’t necessarily mind a dovish RBA and more accommodative monetary policy. Lower bond yields and a weaker currency isn’t entirely a bad thing for stocks. The ASX’s performance will hinge in a bigger way on the global-macro outlook, and what happens on Wall Street. As such, SPI futures are pointing to a 27 point for the ASX 200 this morning, as the index looks to recover some of yesterday’s 0.53% loss. Australian shares are trading sideways presently, perhaps awaiting a clear cue from trade war negotiations taking place in Washington this week, along with the FOMC meeting that commenced last night. Nevertheless, the ASX 200 is being constrained to the upside by its crucial 200-day EMA, with support remaining somewhere between 5780 and 5800.

The latest Brexit vote

The votes have been cast and counted in the House of Commons, and as has been true for so many of these ballots, we are no closer to establishing a firm Brexit outcome. While most amendments were voted down, the Spelman amendment, which would add to the bill that a “no-deal” is avoided, has passed. Despite this, a no-deal outcome can’t be categorically discounted. The Pound has tumbled almost 100-pips, as a delay of Article 50, or better a second referendum, becomes slightly more remote. As Brexit uncertainty remains, attention goes back to May now to see whether she can force concessions from European bureaucrats, as the March 29 deadline creeps ever closer.