Markets re-price for a world of looser monetary policy

Markets continue to digest shifting fundamentals

A high-impact week ended on Friday, with another 24-hours of high-activity, but relatively less price volatility than what had been experienced earlier in the week. There was a lot of the proverbial “digesting” going-on: of all the data and developments that had occurred during the week. Overall, risk assets pulled-back, as upside momentum slowed in global equities; and sovereign bonds and rates markets unwound some of their enthusiasm for central bank intervention. Currency markets saw a great deal of reshuffling, mostly as the USD adjusted for the newly dovish Fed. And commodities traded mixed, but were collectively lower across the board.

Interest rate markets

All-in-all: last week was about global central bankers, and the markets re-pricing of interest rate expectations across the globe. Naturally, the US Federal Reserve took-the-cake as being the most important of all, however the ECB, BOE, BOJ and even our own RBA borrowed the lime-light for at stages to boast their newly dovish-feathers. Market participants now have nearly a cut-and-a-half implied in the swaps-curve from the US Fed at its meeting next month; and in our corner of the aviary, markets are implying an 80 per cent chance of an interest rate cut from the RBA at its meeting next week.

Government bonds

Global bonds have sustained their bull-run on this basis, with milestones emerging wherever one looks. US 10 Year Treasury yields plunged beneath the 2.00% level briefly last week, before levelling out above that mark; while the German and Japanese equivalents delved deeper into negative yielding territory. The Australian 10 Year sovereign bond yield is now trading at a new all-time low of 1.27% – only 2 points above the current overnight cash rate – and at the shorter end of the curve, interest rate sensitive three-year Australian Commonwealth Government Bonds are yielding a paltry 0.88%.

Currency markets

The changes in short term rates markets and bond markets is inspiring a significant shift in global currencies. The US Dollar has tumbled, sparking a reshuffling in the G10 currency space in particular, as the greenback knocks through a handful of key support-levels. The Euro has lifted into the high 113-handle as a consequence, while the Japanese Yen is looking increasing likely to test life within the 106 handle. This dynamic is masking what is a generally weaker Australian economic, and interest rate outlook for the Australian Dollar, with the local unit climbing further into the 0.6900 handle on Friday night.

Gold prices

The perennial favourite (for many) amidst a wave of competitive-currency-devaluations by the world’s major central banks: gold is still shining as a major outperformer in global markets. The price of the yellow metal closed just below the $US1400 level on Friday night, having briefly touched $US1410 in intraday trade. Propelled by the depreciating USD and the growing pool of negative yielding government debt across global financial markets, the rally in gold in looking a touch overstretched for now, as speculators seemingly take-hold of the price. But in the longer-term, further upside for the price of the metal looks fundamentally well supported.

Global stocks

Risk-appetite remains well supported by the prospect of looser global financial conditions; however, Friday’s price action was a little on the flat side. Wall Street stocks closed lower, though the S&P 500 did touch a new all-time high in intraday trade. European and Asian indices experienced similar trading conditions on Friday: falling generally, but doing so on very high volumes. The DAX was down 0.13%, and the FTSE100 dipped 0.23%. The Nikkei fell almost one-percent, and the Hang Seng shed 0.27%, with China’s CSI300 one of the few gainers across global-benchmark stock indices on Friday, adding a modest 0.14%.

ASX

Friday night’s US lead ought to manifest in a roughly 17-point fall for the ASX 200 this morning, following a day on Friday in which the index shed 0.55% during local trade. The price action spoke of a market curbing its enthusiasm slightly, having hit new 11-year highs earlier in the week. The banks led the losses for the index, sapping from it almost 15 points, while a fall in CSL’s share price dragged down the health care sector. Energy and materials stocks managed to contribute the greatest gains for the ASX 200 on Friday, adding a combined 10 points to the index.