Bearishness reigns as markets meet Murphy's Law

Markets run into a little bit of Murphy’s Law

Financial markets ran into a little bit of Murphy’s Law last week. It wouldn’t be too much of a stretch to suggest what could’ve gone, did go wrong: the Fed were less dovish than expected, the trade-war took a new and nasty turn, and the economic data released was a little on the soft side. The ultimate consequence is that, and perhaps only for now, markets are being forced to re-price for a world of marginally tighter financial conditions, and possibly a lot softer economic growth. Naturally, that’s manifested in an escape from riskier assets, into safety, as this new dynamic works itself out.

Friday ended on a negative-note

Friday night’s trade, just for one, proved just another extension of the bearishness building throughout the week. The market received US Non-Farm Payrolls data, however not even that, what is normally the biggest data-release for the month, could distract from the major events of the preceding 2-days trade. Indeed, the jobs-numbers did come out on the low side, and probably irritated the already frayed nerves in the market. Hence: lobal equities bathed themselves in a sea of red; safe-haven government bonds went on a tear, pushing rates on fixed-income assets down; and anti-risk commodities and currencies prospered, while growth tied commodities and currencies faltered.

Markets betting on imminent rate cuts (again)

Given the mix of poor data and growing global risks on the one hand, with central bankers reluctance to go full-dove last week, action in all important interest rate markets is somewhat curious. Price vacillated considerably towards the back-end of the week, as traders balanced US President Trump’s latest trade-war blast, and weak data, with the less accommodative forward guidance from central bankers. The winning view at-this-moment, however, is one whereby an escalation in international trade disputes is going to force central bankers hands. The Fed is always the barometer: traders have moved now to bake-in basically a 100% chance it’ll cut rates again in September.

Bond yields tumble on search for safety

Unlike the months gone by, however, this assumption of an imminent rate cut has not managed to fuel risk-taking and speculative behaviour. Instead, the deteriorating global economic outlook has seen investors run en masse to government bonds. Thus, US Treasury yields have plumbed to fresh two-year lows, with the 10 Year Treasury note finishing Friday’s trade at 1.845%. German Bund yields and Japanese Government Bond yields have dived further into negative territory at -0.50% and -0.17%, respectively. And Australia’s 10 Year government bond is trading at 1.08% – only 8 points above the current cash rate.

Commodity markets tell the story

Typically, financial markets’ connection to material reality: action in commodity markets was arguably most illuminating last week. That ever-swelling pool of negative yielding bonds in global financial markets has pushed gold prices higher again. The precious-metal is fetching $US1440 per ounce, as investors look to hedge their portfolio with anything that won’t cost them money to hold. Oil prices bounced on Friday night, however that was only after they were pummelled the night prior on news of the escalation in US-China trade-tensions. Copper prices, as always, betrayed the clearest concern for the economic outlook: they fell nearly 3% on Friday.

FX markets also showing the effects

Currency markets imitated this general dynamic. The traditional safe-haven currencies rallied, while anything tied to the fortunes of global growth experienced headwinds. The USD was a perplexing one: receiving safe-haven flows on one hand, but also suffering from trade woes, the soft NFPs and monetary policy uncertainty on the other. Obviously, the big gainer was the Japanese Yen: the USD/JPY has fallen to 106 for the first time in over a year. Conversely, the AUD, the growth proxy that it is, has been belted into the 0.6700 handle. The Pound is also facing sustained selling pressure, as fears mount of a looming no-deal Brexit.

Stocks tumble; point to short-term trend-change

Conveying the overall sense of fear in the market right-now: global equities are being sold-off heavily, in an ‘act now, ask questions later’ bout of volatility. Wall Street stocks have receded from their all-time highs, with the benchmark S&P 500 closing Friday’s trade 0.73% lower. More concerningly, that move saw the index close below its 50-day exponential-moving-average, marking a potential short-term trend-reversal. European stocks were harmed even greater by the ratcheting up of trade tensions, diving over 3% on Friday. While the ASX 200 closed the week’s trade over 100 points from its all-time highs, and is expected to open flat this morning.