Trader thoughts - the long and short of it

The S&P 500 briefly touched the 2873-mark in the US session, led higher by consumer discretionary stocks, before selling-off in late trade following the release of news ex-Trump advisor Paul Manafort has been found guilty of financial crimes. The milestone achieved on Wall Street punctuated a respectable day on global equity markets, which were trading-off greater risk appetite until early this morning. Although Asian and European markets are a long way off their US counterparts in terms of fundamental strength, the belief that the global economy can stabilize itself around US economic strength clings-on, giving hope to investors that returns ex-US equities can still be achieved.

Despite the strong lead handed by overseas markets, SPI futures are indicating a lower open for the ASX 200 this morning. As it stands currently, the Australian share-market is set to give up 12 points at the commencement of trade, continuing yesterday’s sell-off that sent the ASX tumbling 1 per cent. Though the precise reason for the sell-off is somewhat murky, the lion’s share of the day’s losses seems to be attributable to the fresh leadership ructions in Canberra. A politicized and not necessarily accurate assessment this may be, the tumble in the overall index was led by financial and real estate stocks, which have apparently been enervated by concerns that yesterday’s leadership spill has handed the bank-and-property-market-unfriendly Labour opposition power come the next election.

It must be said that losses sustained yesterday across the ASX 200 should not be overstated. Political uncertainty and scepticism towards the Labour oppositions attitude toward big-business should be (and will be) factored in to trader’s psychology from hereon-in. However, the broader fundamental challenges the ASX has weathered in recent months greatly overshadow the pettiness of our politicians. The share-market faces far greater trials from shifts in the macro-economic landscape and domestic economic fundamentals than it does political infighting and changes of government. Despite these issues denting confidence, it has not and (likely) will not shift-the-dial when it comes to the ASX200’s upward trend, with corporate earnings, global financial stability and economic growth possessing far greater significance.

The company results released yesterday that held relevance to the Australian share market were on balance underwhelming. Amcor underwhelmed expectations slightly despite forecasting solid profit growth, falling 3.64 per cent throughout the day’s trade, while the share price of Seven West Media climbed slightly despite a 15 per cent fall in profit on news the company cut greater costs than forecast. The most significant mover for the day was BHP, which fell 1.87% after that company flagged risks to growth from slower economic growth, predominantly in China. The fall came despite the company posting its highest profit in four years and delivering a 42 per cent increase in its dividend payment. Investors will turn their attention to the day ahead, which includes results from Lend Lease and Ardent Leisure.

The RBA was in the spotlight of domestic investors yesterday on the back of a speech delivered by RBA Governor Philip Lowe and the release of the central bank’s Monetary Policy Minutes. Coming so soon after the RBA’s comprehensive quarterly Monetary Policy Statement, there was little extra to glean from either event. The key takeaway was (once more) that the next move in interest rates would be up, but this wouldn’t occur until inflation is sustainable above target – at the start of 2020, according the RBA’s assessment. Governor Lowe’s speech all-in-all was a light touch, but of interest to punters was his imploration that after 8 years of low rates, Australian’s must ensure their finances are in order, as property markets can’t always boom, and interest rates must one day shift higher.

China’s markets were bolstered yesterday, following news that the PBOC had announced new measures to stimulate growth. Chinese policymakers are expected to soon lower the risk weight of local debt investments to 0%, to incentivize financial institutions to purchase higher risk corporate bonds. The move comes as another effort by the PBOC to loosen credit restrictions and increase liquidity in financial markets, as a means of boosting investment in its local economy. The policy will increase systemic risks in Chinese financial markets, with banks needing less reserve capital to protect from external shocks. Although this irritates fears that China’s markets are highly exposed to financial instability, the assertiveness shown by policymakers to do whatever it takes to support the economy has been received well by investors, who pushed Chinese shares 1.3 per cent higher for the day.

The major news release in the next 24 hours will be the print of the US Federal Reserve’s minutes from its most recent meeting. The event comes as the US Dollar extends its multi-day fall after US President Trump once again criticized the US Fed Chairperson Jerome Powell and his team’s policy actions. The EUR/USD has gone on a tear this week consequently, bouncing off a 12-month low at 1.1300 to presently trade 1.1570, driving the US Dollar Index through support at 95.40. The weaker greenback is testing its uptrend now, as traders become distracted by President Trump’s antics. The President’s criticisms should be factored in, but as it stands the fundamentals supporting a stronger USD are still intact. Conviction with today’s minutes and from policy makers at tomorrow’ Jackson Hole symposium may steady the ship: keep an eye on long term US bonds for indications of trader’s attitudes.