Trader’s thoughts – trade war leak and broken resistance levels invite bulls into the market

The bulls are coming back:

Traders received the greenlight to jump into risk assets on Friday. It culminated in a substantial jump across global equities and a certain “risk-on” attitude to trading. The impetus was arguably more technical than fundamental. The boost in sentiment in being attributed mostly the leaked news that Treasury Secretary Stephen Mnuchin was planning to lift US tariffs on China. Whatever the motive, nefarious or simply untrue, that story was quickly denied by the White House. However, it signalled enough to the market that progress was being made in trade war negotiations. That extra fuel to this recovery’s fire supported a push above very significant technical levels in Wall Street indices, attracting buyers and further validating the view that the December sell-off is behind us.

The stock market’s biggest fan:

There’s one market participant who is apparently willing that notion to be true: US President Donald Trump. The US President obviously uses the stock market’s performance as a measure of his success – rightly or wrongly. And over the weekend, amidst the very many Tweets that were Tweeted by Trump, this one outlined his view on the US economy and stock market: “the Economy is one of the best in our history, with unemployment at a 50 year low, and the Stock Market ready to again break a record (set by us many times)…” Quite a pledge to make – and one markets participants aren’t going to take too seriously. Regardless, it does provide a perversely comforting story for markets, to know that the US President is wishing this market higher.

Technical indicators strong:

For now, at least, the direction for US, and therefore global stocks, is up. The recovery has scarcely taken a breath to start the new year. Indications are now too that the market (as a whole) is starting to believe that 2019’s early rally is for real. Technical indicators for Wall Street’s benchmark S&P500 were as solid as they have been all year on Friday. Resistance at 2630 was broken through, clearly attracting the many sceptical or nervous market-bulls, pushing the index 1.32 per cent higher for the day. Volume was well-above average for the first time in several weeks too, at 9 per cent above the 100-day average. Breadth was also highly impressive, with 91.3 per cent of stocks higher, and every sector in the green for the session.

The ASX200 set to follow:

Friday’s solid session in US stocks has the ASX200 poised to jump 43 points at the open, according to the last traded price in SPI Futures. The ASX enjoyed its own strong performance on Friday, though it lacked the substance of its US counterparts. Like Wall Street, every sector gained ground on the day. But breadth and volume weren’t a shadow of US markets – in line with the trend of recent weeks. IT stocks were the only sector to attract meaningful interest, largely by way of virtue of a 11 per cent rally from Afterpay Touch Group, after it updated its underlying sales numbers. The ASX200 will eye its 200-day EMA in the day ahead at 5909, a level the index ought to exceed at the open according to SPI Futures.

China in the spotlight:

For all the excitement that markets have achieved the turnaround they were looking for, the week ahead hurls-up several challenges to this narrative. The macroeconomic drivers of market sentiment remain the dual concerns of global growth and US Federal Reserve monetary policy. The biggest risk to global growth comes from China’s economic slowdown – and how the trade war is exacerbating that. Deep insight into the Chinese economy’s state-of-affairs will come today: a major data-dump from the Middle Kingdom arrives today, with GDP figures headlining the lot. Much of the upside experienced in markets recently has come from hope and speculation that the Chinese (and therefore global) economic outlook is better than previously expected. The data from China today will put this hope to the test.

Australian Dollar:

As it always is on these occasions, the Australian Dollar will likely prove to be the barometer for sentiment relating to today’s data from China. There’s been relatively thinner commentary about currency markets, and the A-Dollar by extension, in financial markets recently. There was the flash crash which generated headlines, however putting that aside as a temporary quirk of market malfunction, volatility in currency markets has been quite subdued. Realized volatility in the AUD/USD is presently 5.45 – a very low reading, especially for currency so exposed to risk/growth dynamics – with the pair trading within a 100-point range for best part of 2 weeks. Though by no means guaranteed, perhaps today’s Chinese growth figures will ignite some of the action speculators are craving.

Other risk events:

US markets will be closed on Monday for the Martin Luther King Day public holiday. Several of the secondary and tertiary risk-factors moving markets will keep relevance in the next 24 hours. Brexit will hit the headlines as UK Prime Minister Theresa May prepares to table alternatives to the House of Commons after last week’s failed “meaningful vote”. The US Government shut down will drag on further, after Democrat leaders declined to cooperate with President Donald Trump’s latest salvo to end the stand-off over the funding of his border-wall. And the international economic elite will gather in Davos this week for the World Economic Forum, where issues such as global trade and the normalization of global monetary policy will be the hot topics.