Trader's thoughts - The long and short of it

ASX was up; but global stocks struggle

The ASX 200 looks lonely on the intraday-market-map. Of the world’s most watched equity indices, it stands-out as the lone sliver of green in an otherwise sea of red. There is 2 hours left in Wall Street trade at time of writing, so, yes, this is to assume US stocks don’t rally into the close. With the themes playing out in financial markets in the past day or so, this is certainly looking a long-shot. Selling truly has been rife wherever you look. Volumes have been elevated across global markets, betraying a conviction behind this bearish impulse in the market. The cause for the pull-back is clear in the mind’s of market-participants: the future of global growth is still dimming.

Dovish ECB; bearish market

Looking at some of the economic data received this week, and one might be (somewhat) forgiven for believing that the global growth outlook has proven better than once thought. Ignoring Australian data for a moment – it really isn’t that influential on the world stage – global economic data, while certainly mixed, hasn’t flashed any dire warning signs. The turn in sentiment can largely be laid at the feet of the ECB last night. ECB President Mario Draghi and his team has seemingly spooked markets, downgrading the Eurozone’s growth forecasts to a measly 1.1%, and announced a fresh program of long-term bank lending to support financial conditions and boost credit creation in the economic-bloc.

Euro-falls as ECB rate-hike bets unwound

Market participants knew that such an outcome was likely to come from last night’s ECB meeting. For whatever reason, the confirmation of Europe’s impending slow-down still rattled traders’ nerves. Interest rate markets were awoken back into reality. The implied probability of a rate hike this year from the ECB tumbled from around 50% to just above 20%. German Bund yields were hammered, falling to 0.06% – lows not seen since the end of 2016. The Euro was gut-checked, as were the Europe-sensitive Scandi currencies and the Pound, galvanizing a flight of capital into USD denominated safe-havens. The USD now sits points away from multi-year highs.

Bad news actually meant bad news

This shouldn’t be refreshing, but when bad-news actually means bad-news, it restores a little bit of sense in the financial world. What is meant by this, is that very often, especially as it relates to the US Fed, bad economic news for the “real-economy” is seen as a positive for financial markets. That is: softer economic conditions implies lower rates and more cheap money, which means its less risky to take a punt on risk assets. It’s perverse to think this way. But seeing a bridge between the “real economy” that most people live-in, and the (arguably) false economy occupied by the minority, provides a bitter sweet consolation that if pain is necessary, then at least its justly shared.

Huawei to sue US government

That’s a little abstract, of course. People, policy makers and market participants probably won’t welcome any sort of dramatic tragedy in their financial affairs. Especially so, when geopolitics adds another level of danger to markets and the economy. For one, Chinese stocks were downed during yesterday’s Asian trade, following news that Huawei planned to sue the US government, on grounds that US legislation, recently enacted, banning government agencies from buying Huawei products is “unconstitutional”. There is a brilliant irony in a Chinese company, with alleged ties to the Chinese government, challenging the constitutional spirit of a US law. It’ll be a political soap opera to watch. For market-bulls, it will be one to watch for its implications for the trade war.

ASX registers a solid day

Fortunately, though, for market bulls: yesterday’s Huawei news contained its impacts to Chinese markets. Here in Australia, as alluded to earlier, stocks marched to the beat of their own drum. The weaker Australian Dollar and fall in interest rate expectations continued to support the ASX, with dividend-stock dominated sectors like utilities and the tele-cos leading the market higher. It will be interesting to see how long the sugar hit related to the assumed rate-cuts from the RBA this year will last. Fundamental growth must come back to fore. And perhaps that will be soon, with the heavily weighted mining sector retracing as industrial metal prices fall; and the banks demonstrate signs of weakness due to a local economic slow-down.

US Non-farm Payrolls tonight

Speaking of the Australian Dollar, with the USD rallying like a freight-train this morning, a break into the 69 handle looks increasingly likely. At time of writing, the currency is trading at 0.7010, and could quite easily make its foray below 0.7000 at any stage today. If not, the major flash point could come this evening: perhaps the week’s biggest data release drops – US Non-Farm Payrolls. The US unemployment rate is expected to have dropped to 3.9%. As always, the key point to watch will be the average hourly earnings number. If it comes into hot, the USD stands to rally, as markets become forced to price in a rate hike in 2019 by the Fed.