Trader's View - Risk-neutral, growth-positive, mixed-signals

Growth fears ease; risk taking subdued

Risk appetite wasn't terribly high overnight. But in saying this, the persistent, vexatious concerns regarding the global growth outlook has continued to abate. Markets have become used to modifications in the growth outlook manifesting in a powering of risk-on behaviour. Given the economic backdrop, the reasons for this are pretty intuitive. Just as far as last night's trade, though, this relationship didn’t hold quite so strongly. There were clear signs that market participants were tempering some of their worst fears about global growth. However, risk-assets didn't respond in the way that they have in the recent past. Not that this should be looked into too much; it's just been a curious truth that's lead to a touch of head scratching last night.

More good news than bad

It would be wrong to suggest it was a bad day for equity markets. More, that given some of the news in the market, and the cross-asset price action, a stronger move higher might have been expected. The macro-development that captured most attention was news of "new progress" in the US-China trade-war, that boosted hopes of a breakthrough in upcoming trade-negotiations in Washington. In a muted response, Wall Street has edged a trifle higher last night, with the S&P hovering around the 2870 mark. European indices performed a little better, following some strong Services PMI numbers, while Asian indices probably led the pack in the last 24-hours.

Bonds tell the story (again)

Evidence that market participants are re-pricing their global-growth-concerns, in part due to the trade-war developments, manifested in the bond market. A move inverse to that which markets saw last week, government bonds have retraced their gains, as traders reassess the immediacy of what is a widely accepted slowdown in the global economy. It's been the middle of the curve that has demonstrated most movement, with the US 10 Year Treasury note making a foray back above 2.50%; while the equivalent German Bund is making a run out of negative yield. In fact, part of this move in bond markets could explain some of the flatness in equities overnight, as the swift jump in discount rates diminish equities' relative appeal.

Yield fluctuations show in currencies

The slightly, and probably transitory, revision to global growth has naturally manifested in the currency market. The AUD and NZD performed strongly yesterday, while the Japanese Yen and US Dollar fell. The quick normalisation in bond yields supported the Euro, which continues to hold onto the 1.12 handle in the face of geopolitical risks and a concerning trend in the continent's growth. Gold prices also dipped on the normalising yield environment, and sits someway of its highs, though its losses were contained by the weaker greenback. The Pound also leapt higher, but as always, that was due as much to Brexit speculation, as it was to any other macroeconomic driver.

Overall: a day of mixed signals

Really, if anything ought to be inferred from market behaviour yesterday, it's that it was a day of mixed signals. Upside in global equities is practically expected, as earnings forecasts stabilise, P/E ratios remain in a normal range, and monetary policy settings stay accommodative. Certain indicators of the "real economy" are favourable too: the gold-to-silver ratio keeps climbing, credit spreads are falling, while industrial metals keep trending higher. However, some cautionary signals remain: the VIX looks unnaturally suppressed, the "smart money" isn't supporting these news highs, and yield curves are completely bent of shape still. The path of least resistance for equities is higher, however the climb there could still be treacherous.

ASX to open lower, following solid day

Never to be left behind on a global trend, the Australia 200 ought to open a little lower today. The good fortune was flowing for the index yesterday, as the trade-war developments, the Federal Budget fallout, and another big lift in iron ore prices fuelled the market to multi-month highs. The materials stocks naturally lead the ASX higher, but the effects of the night prior's budget was plain to see: industrial stocks, the Real Estate sector, and utilities all fed off the news of fiscal stimulus. The eyes were on consumer discretionary space, given the support to households in the budget. It traded slightly higher, though most of the budget's news had already been baked-in.

Retail Sales beats, easing local concerns

The good-news story, in a domestic sense, for Australian markets came in the form of Retail Sales data yesterday. It exceeded expectations considerably, printing month-on-month growth of 0.8%, against a 0.3% estimate. The fine print was interesting: on the month, Australian’s spent their discretionary income on eating-out, generally forewent spending on attire, and spent a tiny-bit more on department store spending and household goods. Overall, markets reacted bullishly to the data: the Australian Dollar rallied to trendline resistance at 0.7130-ish, and bond yields jumped as traders repriced the number of expected rate-cuts from the RBA before the end of 2019 to 32 basis-points.