Trader’s thoughts – the pullback arrives, recovery to be put to the test

The pull-back is here:

The pull-back markets were waiting for – the one we inevitably had to have – has arrived. It’s risk-off across financial markets and the optimism that drove global stocks off their December lows has subsided. Relatively speaking, it’s been a day of significant downside, but nothing yet to warrant tremendous fear. It should be common knowledge, but it bears repeating: proper validation that global equities have truly established a recovery ought to be judged not by the latest high, but by where markets form their next low. The retracement which is apparently upon market participants now hands a golden opportunity to judge this market for what it truly is – have the bulls reclaimed their dominance, or have the bears lulled them into a trap, and now stand poised to assert further downside?

The market’s rationale:

A greater look at this subject and Wall Street’s price action later. In relation to the overnight sell-off, the rationale was as feeble as the one that got stocks to their recent peaks in the first place. It’s been chalked up to reduced positivity towards the trade-war, and renewed concerns about global growth. To begin with, very little data throughout the past week has provided a clear and substantial picture on economic growth. The boost in sentiment has come from geopolitical or monetary policy developments that was assumed to be supportive of the growth outlook – at some point in the future. Some nice-noises made between the US and China in trade negotiations here, and a few dovish comments from a handful of US Fed speaker there, is what ignited the latest part of the risk-on rally.

Awaiting confirmation:

Hence, it was naturally the inverse of this situation that’s prompted the leg lower in global stocks. US Fed speakers have quietened down as markets prepare for the central bank’s next meeting at the end of the month. And a story-or-three about storm clouds looming on the horizon for the global economy has quashed the naïve hope that incremental improvements in the trade-war will lead to a renewal of the global growth story. Now, bullishness may yet return to markets, and quite soon at that: US reporting season hands the opportunity to be able to assess meatier, fundamental data, rather than shallow headlines. The issue now may prove the uncertainty in the lead-up to such information: we are a fortnight away from getting a complete picture on US corporate earnings.

The overnight headlines:

Sifting through the stories that mattered to markets in the last 24 hours, and one can understand why bullish sentiment has reached a lull. The downgrading by the IMF of its global growth forecasts established the context, but it was fresh fears of a major Chinese economic slowdown that really got traders edgy. They were piqued first by news that the US is sticking with its pursuit to have Huawei’s CFO extradited to the US; and then exacerbated by a speech delivered by Chinese President Xi Jinping about the deteriorating state of his country’s economy. The latter was especially unsettling: President Xi warned of potential social instability if China failed to regain control of its economy and deliver the growth required to keep satisfied the nation’s people.

Brexit and UK data:

Not that it registered as highly on trader’s macro-agenda last night, but the UK economy did share in the focus. Of course, the Brexit drama continues to unfold: Opposition leader Jeremy Corbyn made his play in the House, tabling a series of votes designed to avoid a no-deal Brexit. The news ought to be friendly to markets, and perhaps the Bremainer cause, but it didn’t do much to move UK markets. What did however, was the release of UK labour market figures overnight, which showed an increase in wages and a fall in the unemployment rate. The data, in the face of Brexit-uncertainty, pushed the Cable toward the 1.2980 mark, and lifted the implied probability that the Bank of England would lift interest rates at some point in 2019.

A risk-off day:

Looking forward to the day ahead and the economic calendar is fuller, but little jumps out as possessing the weight to turn the tide in sentiment. The Bank of Japan meet this afternoon, New Zealand’s CPI numbers are released this morning, and stories from the World Economic Forum in Davos will filter through throughout the day. Safe-havens will maintain their bid, one assumes: equities are being sold-off, the JPY is higher, gold has climbed, oil is retracing, and US Treasuries have rallied 4-to-5 basis points across the curve. The Australian Dollar, as its wont to do in these situations, has dipped, and looking as though its latest run higher is done-with. The local unit is presently just above 0.7100, as it eyes support at 0.7040.

ASX test ahead:

SPI Futures are suggesting a 31-point fall for the ASX200 at time of writing, in sympathy with Wall Street's sell-off. The ASX200 closed the day 0.5% lower yesterday, at 5858, led by a noteworthy enough tumble in the bank stocks. The short-term uptrend has now been broken, with support at 5800, 5700 then 5630 now in view. The RSI confirms a meaningful slowdown in momentum for the market, however unlike US markets, volume is well below the 100-day average still. The daily chart has established an apparent reversal pattern now and indicates a new high has been made. Just like its global counterparts, the market's essential strength will be tested, with the capacity to form another higher-low crucial to confirming a true bullish trend in the market.