Trader's view - Markets continue to chop around on trade-war headlines

The headline news

The trade-war headlines are coming in thick-and-fast, with none of them truly substantial. Nevertheless, they have proven sufficient to belt market sentiment around, and dictate financial market activity, once again. A re-cap of the (dis-jointed) narrative is handy, for the benefit of context. Yesterday our time, markets trembled on news that, at one of his notorious “MAGA” rallies, US President Trump announced he thought the Chinese “broke a [trade] deal”. Stock markets fell. Then last night our time, markets bounced on news that US President Trump announced he has an “excellent” alternative deal with China, and he and China President Xi were in communications. Stock markets jumped.

More volatility looks likely

It’s been something of a wild ride in financial markets in the last few days – perhaps made worse by the relative calm that has preceded this latest outbreak of trade tensions. The S&P 500 is demonstrating much greater volatility now, with the VIX still elevated and trading around the 19-mark. More than likely, this patch of turbulence isn’t behind market participants yet. Of course, the next 12-18 hours will be crucial, as the 12:01AM (ET) deadline to strike a trade-deal nears. The balance of risks, at a cursory glance, looks as though one won’t arrive, and that means tit-for-tat tariff increases from the US and China tonight.

Moves in markets sentiment driven

What this fundamentally means for financial market activity isn’t precisely known. Analysis on the subject seemingly relies on some crude and intuitive heuristics: the textbook suggest that tariffs lead to higher prices, lower consumption, less trade, and weaker economic growth. And rationally, this is probably true, and will manifest over time if tariff increases are implemented, and stick-around, long term. But for now, at least in the hard stats in the available financial data, the consequences of high barriers are yet to truly manifest in forecasts. The market behaviour witnessed this week is sentiment driven, meaning volatility will remain heightened while trade uncertainty exists.

S&P500 closes above resistance

Given that the trade-war isn’t clearly manifest in fundamentals yet, the pullback in Wall Street stocks is more a function of market psychology rather than anything essential to the market, at least in the short term. Just as new all-time highs invited the herd into the market, and pushed the S&P 500 into overbought territory, the re-inflammation of US-China trade tensions has prompted the herd to sell-out, dragging the market lower. Picking tops and bottoms, over whatever time scale, is a mugs game. But the fact the S&P 500 has managed to close above 2855 support is a positive signal for market-bulls.

Other market-risks being overlooked

Perhaps the biggest risk, given this preoccupation with the trade war currently, is that it ignores the more fundamental factors in the market. The biggest of these, as it purely applies to the longevity of Wall Street’s bull run, is of an interest rate shock from the US Fed. Granted, such a shock is a low probability. Regardless, given that the recent highs in US equities were engineered by central bankers’ dovishness, it pays to be privy to the relevant data - especially as it applies to inflation, which the Fed Chair Jerome Powell maintains is low only due to “transitory” factors.

US inflation data tonight should be watched

That makes US CPI figures the crouching tiger of financial market risks this week. All of this hysteria related to what’s proven a mis-pricing of trade war risks has seemingly led to the ignoring of potential fundamental pressures. This isn’t to suggest that some sort of inflation shock ought to be expected from US CPI data. But based on economist estimates of the data, consumer inflation on a quarterly basis ought to print another robust 0.4% tonight. One print won’t change the trend in the market; however, it could add to the story that market rate expectations are out of line with reality.

AGB yields fall; weakens currency, strengthens stocks

Such an issue is unlikely to trouble the Australian economy. Inflation expectations have diminished greatly, and that factor, combined with concerns about Australia’s growth outlook in the fact of deteriorating US-Sino trade-relations, has seen 10 Year Australian Government Bond yields tumble to all time lows this week. The fact has also driven the AUD/USD to multi-year lows in the past two-days; with both the lower yields and the lower currency a net-benefit to the ASX 200. As far Aussie stocks today: SPI Futures are suggesting the index will open 9 points higher, ahead of a day highlighted by the RBA’s statement this morning.