China trade olive-branch sparks stock market rally

China’s olive branch on trade boosts sentiment

Stock markets in Europe and North America rallied overnight, after China announced it would not be retaliating immediately to the latest round of US tariffs on its economy, and that US President Donald Trump suggested his administration would be reaching out to China today to share “talks”. The combination of stories bolstered market sentiment, as a sliver of hope emerges that the trade-war combatants can at least start negotiating once again. So: the S&P 500 managed to rally over 1.3% during Wall Street trade, while the DAX and FTSE 100 added around 1% in their respective sessions, setting up the ASX 200 for a 47-point jump at the open this morning.

Stop me if you think you have heard this one before

If you are feeling cynical about China’s or the American’s latest change in rhetoric, or maybe even the market’s response to it, by no means are you alone. Perhaps it’s a matter of being misled by these sorts of stories one-too-many-times-before, but a general feeling amongst the commentariat overnight is that this is just another trade-war headline, and another empty stock market rally, lacking any true meaning. Price action in global markets probably betrays this a little. Stocks have jumped higher on the news, but the same level of the enthusiasm can hardly be felt in other areas of the financial markets.

Outside stocks, the reaction was muted

For one, bond yields are only a skerrick higher overnight, and in the bigger picture, remain historically low. Gold prices, as an extension of this, remain angled strongly to the upside. Growth sensitive commodities have lifted slightly. However, their trends remain pointed firmly to the downside. There hasn’t been any sort of speculative play into growth-proxy currencies either. In fact, the price action seen in the G10 space probably resembles more of the risk off variety. The USD topped the table overnight, while the AUD remains mired in the low 67-cent level and the NZD is close to touching 62 cents.

Equity indices remain firmly in recent ranges

Digging below the surface of what’s happening in stock markets, too, and a lack of conviction in last night’s moves is demonstrable. Again, activity was low overnight, with the volume behind last night’s Wall Street rally underwhelming. Also, global equity indices are still range trading, at best. Indeed, the news last night could prove the catalyst to break global stocks out of this holding pattern. But as it stands now, price is saying little has really changed. As the best benchmark for global stocks: the S&P 500 is still languishing below its 50-day Exponential-Moving-Average, revealing price momentum remains technically to the downside.

A few lines in the sand

The same goes for the ASX 200, which has broadly mirrored the trading activity on Wall Street for several weeks. It appears that, crudely, the 6600 level for the ASX 200 is what the 2950 level for the S&P 500 is right now: a big, technical and psychological line in the sand that suggests market sentiment has actually turned. Until that happens, the range is still in play, and therefore, the current status quo prevails. It’s been said a lot, but everything in global markets – from central bank policy, to the global growth outlook, to corporate earnings – on the trade-war. Investors continue to wait for a true, substantive change in the conflict.

After the trade-war, data and central banks to be watched

Underneath the “will-they-won’t they” trade speculation, the broader focus will be on the economic data, and gauging central bankers’ appetite to address any possible economic slowdown. Two stories emerged on that front last night. The first: US GDP data printed in line with expectations, and provided a brief reprieve from US recession concerns. The second: a key member of the ECB suggested the market should not expect the ECB to jump ahead with fresh QE in response to Europe’s own slowdown. That story apparently shook the nerves of investors: the next worst thing after the trade-war, it appears, is central bank policy that moves too slow to address its consequences.

Australian data to be under the spotlight today

Australian investors will have the opportunity to confront that issue today, as local Building Approvals data is released. The numbers will come hot on the tail of yesterday’s Private Capital Expenditure Data, and Wednesday’s Construction numbers, which greatly disappointed expectations, and raised fears of a much weaker than estimated GDP print next week. Business activity and investment appears to be slowing across the Australian economy at a rate more rapid than previously assumed. Traders are boosting their bets again that the RBA cuts rates next in October – a phenomenon that is seeing the Australian Dollar continue to grind steadily lower.