A slow start to the "biggest week in 2019"

Global equities start week slow ahead of big week

Global equities got-off to a meandering start to a week that’s being dubbed by many as the “biggest of the year” for global financial markets. Event risk is neatly lined up throughout the week now, after what was a rather quiet intro to it, yesterday. The S&P 500 has pulled back slightly from it’s record highs, as US tech-stocks retraced some of Friday’s rally. The Dow Jones was a little higher, betraying a sustained appetite for mega-cap stocks. European equities were also generally lower on markedly thin trading activity. Despite what was a lukewarm night’s trade, SPI futures are suggesting the ASX 200 ought to jump 33 points this morning – to open at new record highs.

Pound down, driving the FTSE higher

The noteworthy exceptions to financial markets’ lacklustre 24-hours was the action in the Great British Pound and FTSE100. The GBP was dumped yesterday, driving a rally in the UK stocks, as fears grow of a coming hard Brexit, after new UK Chancellor Michael Gove stated over the weekend that the government is working on the assumption of a “no-deal” Brexit. To qualify: UK Prime Minister Boris Johnson has sought to water down that commentary overnight. Nevertheless, as far as markets are concerned, the combativeness of the new Johnson cabinet materially lifts the chances of a possibly-economic crippling no-deal Brexit, with the Pound primed for further downside in the long-term while that sentiment persists.

ASX200 bucks Asia’s soggy start

Australian stocks bucked the broader bearishness in Asian financial markets yesterday. The first day of the week’s trade for the Asian region was characterized by some risk-off positioning ahead of a loaded 5-days of event risk. The price action on the ASX 200 proved the exception to the rule. The benchmark index hit a new 11-year high, closing less than 20-points shy of the intra-day record-high registered in 2007. It was a day of broad-based gains, too. All sectors finished higher for the day, with the notable exception of the Real Estate sector, which fell around 0.70% on very weak breadth, even in light of another round of solid auction clearance rates over the weekend.

ASX200 looks overcooked, but the trend is its friend

The ASX 200 is showing some classic signs of being a touch overstretched and overbought where it currently trades. Yields on equities remain attractive, and the price-to-earnings ratio is high but within historical norms; but the price-to-book and price-to-sales ratio are at decade-long highs, betraying a market prospering not necessarily because of an outstanding earnings growth outlook, but one that is benefiting from lower interest rate settings. From a technical perspective too, the relative strength index on the monthly chart is showing the first overbought reading since 2007. The trend is certainly to the upside. But this is a momentum driven market, not necessarily one founded on overwhelmingly strong fundamentals.

The Bank of Japan highlights the Asian calendar

The Bank of Japan is the first major central bank to meet this week, with that central banks; monetary policy committee meeting this morning. Unlike almost all its developed market peers, the BOJ aren’t expected to do anything material with their monetary policy settings at this meeting. Remarkably – and it must be said, the bar is always set low for Japan – economic fundamentals in Japan have thus far shown resilience in the face of the unfolding global economic slow-down. Backward looking indicators are relatively solid, when compared to recent history. GDP growth is around its 10-year average, the unemployment-rate is very low, while CPI remains trending (very modestly) to the upside.

Markets looking for guidance and reassurance from BOJ

Thus, there is little pressing need to implement fresh monetary policy stimulus for the Bank of Japan today. The focus, instead, for the market is what the central bank says about how it’s preparing for mounting global macro-economic headwinds. Afterall, forward looking indicators for Japan are looking just as vulnerable as those in the US and Europe. In part, the BOJ’s rhetoric today is more about sustaining stability and confidence in light of this looming dynamic. The bank is still employing negative interest rate settings and massive asset purchasing programs to drive stimulus into Japan’s economy. Markets want to know what more it can do to combat another expected period of economic malaise.

The BOJ: what for stocks, what for FX?

For financial markets, promises of greater bond yield control to manipulate long-term interest rates will be welcomed by investors who have an interest in loose financial conditions. Whether that is forthcoming will in large part determine the fortunes of the Nikkei around the event, today. The more curious issue may lay in the laps of the FX market, however. There is growing speculation, fuelled by BOJ board members, that the central bank may look into currency market intervention if the Yen continues its upward trend. Signs of an openness to doing so by the BOJ in and of itself could lead to a depreciation of the Yen, especially against the recovering USD.