Sell-off abates amid low news flow and activity

Risk-assets up, but trade was tepid

The overnight session was, on balance, positive for risk assets, though the conviction behind market-moves was missing. The S&P 500 – the natural barometer for market-mood currently – experienced a middling day. It’s closed more-or-less flat, having made a failed foray higher throughout Wall Street trade, to have sold off right-below crucial resistance at 2800. For the bulls in the market, circumstances didn’t fundamentally change last night. The short-term trend is pointing to the downside, with momentum clearly holding in that direction, too. The 200-day moving average is acting as a magnet for the index now, seemingly keeping the market neutralized until the next market-moving catalyst.

News-flow thin, ahead of a busy week next week

And at that, this week has very much been characterized by that general theme: for all the risks, and generally bad news, in the world, a thin data week has deprived market participants of fresh-trading fodder. There has been high impact news and events, it must be said. But much of it doesn’t relate to the news that markets are watching for to either driver the present trend further, or inspire something of a trend-reversal. A lot of that is due to the time of the month, but even still, given the heightened tensions in markets, one might have expected a little more substantial news-flow.

Fears building still in the market

Indeed, there are trade-war headlines floating around the traps, and of course it’s that subject that’s responsible for equity markets’ global pullback. However, for better or worse, US President Trump – the man whose words (or Tweets) matter most – has been conspicuously quiet about trade this week. So as-a-result, the prevailing trend of the last 3 weeks has continued unabated. Market participants are betting on a global economic slowdown, and feel little inclined to take risks. Stocks are selling-off accordingly, while bonds are going on a tear, as traders position for a deterioration in global growth conditions, and a subsequent need for central bankers to cut interest-rates.

The counterbalancing factors

This general assessment of the state-of-play ought not to be considered catastrophic – at a minimum: not yet. There are reasons to be somewhat upbeat: earnings on Wall Street haven’t been revised aggressively lower in response to the perceived threat of the US-China trade war. Furthermore, the sell-off in global equities might just as much be due to a reversal in momentum chasing, after a time when stocks markets got bid very high. And at that, volatility could be chalked-up to uncertainty rather than a tangible change in fundamentals. No doubt, the chance that things could get worse from here is elevated, but not a certainty.

Markets betting on rate cuts

There is also reason to believe global policymakers will cushion the blow of any material economic slowdown. And probably, this variable is where things could really shift. Markets are pricing that indeed the Fed, as well as many other global central banks, like the RBA, will cut interest rates aggressively in response to slower growth. The view point has certainly kept stock valuations attractive, and given hope to market-bulls that the global economy could perform a soft landing. This isn’t manifesting in price action now, but if earnings growth remains positive, lower rate expectations will keep underpinning equity market strength.

Might the Fed save the day?

And last night, optimism was massaged slightly that the Fed may be willing to support this attitude. US Fed Vice-Chair delivered a speech, in which he affirmed the bank’s view that the economy is in “a very good place”, but that the Fed is on standby to consider downside economic risks. That message, though moderate in its delivery, does mark a creeping dovishness in “Fed-speak”, which has thus far been absent throughout this market slow down. It can’t save the day forever, but for markets in the short term, knowing the Fed is on standby is a soothing notion.

ASX to open higher, with China data in focus

The culmination of last trade’s trade will see the ASX 200, according to SPI Futures, open 20 points higher this morning. It will only be a modest recovery, following a day where the market shed 47 points, on the back of some broad-based, trade-war fear related panic-selling. The ASX will be quite attuned, indirectly, to the trade-war narrative today. The major data release in the Asian session will be Chinese Manufacturing PMI data. What goes for the Chinese economy, goes for Australia’s. If the trade-war is seen to be weighing on Chinese manufacturing activity, expect fears to be ratcheted up about a worse-than-expect global economic slow-down.