Trader’s Thoughts – ASX misses the party as CSL and CBA weigh

ASX missed the party

The ASX bucked the trend yesterday, at least across the Asian region, closing 0.26% lower at 6063. Ostensibly, Australian shares missed-out on the party: global equities were noticeably higher across the board, with the other major regional indices in China, Japan and Hong Kong adding well in excess of 1% for the day. Though a step-back for the Bulls, it's no cause for alarm: the price action speaks of a few idiosyncratic quirks on the ASX 200 yesterday. The index was weighed down by a few heavy-hitters: CBA went ex-dividend and its share price fell 2.89%; and despite reporting some solid results, over-zealous investors dumped CSL following the release of that company's earnings, to push its share price down 3.92%.

CBA and CSL weighed on the ASX 200

In an index like the ASX 200, which is quite top heavy, when 2 of your top 5 weightiest stocks underperform markedly, registering a day in the green is always going to be a challenge. Other measures of how the market performed for the day present more favourably for the Australian share market. Breadth was respectable at about 60%, for one. There was another failure by the ASX 200 to break resistance at 6100, which might add to the view the market has gassed-out in the short term and is due for a pullback. Conditions for medium term upside remain in place nevertheless, especially if the prevailing macro-themes in the market, ranging from central bank policy to the trade-war, continue to fall the way of the Bulls.

Risk appetite elevated on positive news

SPI futures are indicating a modest lift in the ASX 200 this morning, of around about 6 points. Wall Street, at least as this is being written, is registering another day of gains, albeit on some pretty low octane trade. The week in global equities has been defined by more positive trade-war headlines, which has raised the prospect of a continued freeze in trade tensions. It's difficult to imagine that the trade-war will go away any time soon, but markets probably have accounted for that in prices. Global growth will stay the underlying bugbear, so long as central bankers don't rattle the cage with rate-hike talk again. However, a weaker global economy is something traders seem willing to stomach for as long as recession risk remains low in the short term.

Upside exists as long as recession risk is low

That's likely where the current equity market-run would stop in its tracks: if a recession finally hits one of the major economic regions. In the absence of this though, history suggests that, although the returns would be meagre compared to what was experienced during the "synchronised global growth" upswing in 2017/18, gains in stocks in an environment of slackened global growth are still possible (if not the recent norm) if loose monetary policy is maintained. It’s looking as though a familiar dynamic is taking hold: a fundamental search for yield, in an environment that supports risk taking, is seeing capital move out of safer assets in fixed income and cash markets, and into higher yield equity markets – boding well for global equity indices in the short-to-medium term.

For now, its Fed before fundamentals

Market participants have proven their concern is first with the Fed and financial conditions, followed by fundamental concerns like earnings, global growth and concomitant factors like the trade-war and geopolitical ructions. Again, that balance would shift in the event recession risk becomes too heightened. While not an immediate problem now, such a risk ought not to be waived away. Economic data is treading a fine line, especially in Europe, and would indicate the world economy is on some sort of slippery slope. China is in the same boat, but unfortunately the opacity of their financial system and economy make it difficult to garner a credible view on the Middle Kingdom. The US stands out as a beacon in the global economy presently and is willed by the Bulls to maintain its currently solid growth outlook.

Inflation risk looking low

One risk that doesn't appear too bothersome for traders -- in fact, it may be a welcomed dynamic -- is that inflation in developed markets is apparently flatlining once again. It was a theme of last night's trade: market’s received inflation data out of the U.K. and US economies, prefacing the release of Chinese CPI data today. On balance, CPI missed expectations in both the US and UK overnight, presumably to the relief of central bankers, who in the face of market volatility and growth concerns, would loathe being pushed into hiking rates because of an inflation-outbreak. In response to the news, traders maintained their position that global rates will stay low this year, as the global economy wrangles with its current funk.

European bond curves flattening; greenback stands to benefit

Bond curves have flattened in the European region, consequently. Bizarrely, and this does not bode well for the Euro and Pound potentially, markets are still pricing in some-chance of a rate hike still from the Bank of England or European Central Bank this year. Far be it to argue with the will and wisdom of the market but given Brexit tensions and clear signs of cracks in the continent’s economy, the notion rates can move higher in this dynamic is fanciful. The USD will be a barometer for European (and probably global) growth risks, as well as the rate outlook for the BOE and ECB. Although the greenback is still range-bound here-and-now, a desire for safety and higher yield should attract investors to Treasuries, and subsequently bolster the USD going forward.