Stocks pull back, bond yields fall, as markets position for business end of the week

A pullback without the panic

Global equities retraced some of the week’s gains, as bond markets rallied once again, and a small play out of riskier assets occurred, last night. Although the VIX did edge higher, this wasn’t one of those panic-stricken days market participants have become accustomed to in the past month. Volumes were very low, especially compared to what’s been experienced during the other intra-day sell-offs in stock markets recently. Instead, this sell-off possessed the hallmarks of a market “pre-positioning” for a handful of high-impact events in the next day-or-so. Ultimately, the fundamentals haven’t changed yet – but last night’s pullback in stocks shouldn’t be read as that they’ve become any worse.

The bears hold control still, as data comes into focus

The fact momentum alone couldn’t sustain the run higher in European and North American stock markets probably speaks of a persisting bearishness right now. Despite some terrific intra-day rallies in equities, there isn’t a categorical cue (yet) that risk sentiment has recovered. Markets are still worried about the global economy and earnings downgrades, and the bets are that central bankers will pull out all stops to fix this problem. That dynamic is keeping pressure on yields, and capping stock market gains. The market does enter the business end of the week now. Focus will be narrowed on a raft of central bank news, and tier-1 economic data.

RBA highlighted the data docket yesterday

In the day’s local economic highlight yesterday, the RBA released the minutes from its August meeting. Though certainly containing some interesting insight about the drivers of global economic activity, as well as the likely monetary policy response, market participants found little new, market-moving ¬information within the document. Rates markets and the AUD barely budged on the release, as traders remain preoccupied with global macro-economic news. As it presently stands, the market is still betting that the RBA cuts interest rates twice in the next 6 months, or so. The first, to likely come in October; the second, likely in January next year.

RBA sees economic risks skewed to downside

Judging by the RBA’s minutes, though, and it appears the central bank sees risks skewed to the downside, for now. Echoing a message being delivered by several of the world’s largest central bankers currently, “trade and technology” disputes between the US and China is weighing on business investment across the globe, and slowing down economic activity. Global growth is still expected to be positive in the period ahead. However, any further escalation in the trade-war would, according to the RBA, add to the downside pressures to the global economy, and probably necessitate more aggressive monetary policy easing.

The thing keeping central bankers up at night

Therein lies the central dilemma for policy makers across the world right now. Labour markets are tight and consumption, on the aggregate, is fairly strong. But weaker business investment could skittle these things, and catalyse a drop-off in employment, and consumer activity down the line. Central bankers are going to cut rates, and cut rates hard in attempt to stoke business investment and continue to drive employment and consumption. But what if, because of the uncertainty brought about by the trade-war, businesses don’t invest? That’s the issue likely keeping central bankers up at night – and could be the difference between economic slowdown, and recovery.

FOMC Minutes to highlight today’s trade

The minutes for the FOMC’s August meeting highlights the data docket today. The Fed cut rates at that meeting, but as is reasonably well known, completely fumbled (again) its communications to the market about the likely trajectory for US interest rates. US Fed Chair Jerome Powell suggested, on the one hand, that the Fed’s last cut was simply a “risk management cut”; while on the other hand, stated the Fed’s intention to “act as appropriate” to continue the US economic expansion. The subsequent confusion has underpinned a lot of the volatility experienced in financial markets recently, as investors question the Fed’s will to support the US economy.

The next possible cause of volatility

This ‘Will they? Won’t they?’ dynamic is sowing seeds of potential market-volatility. Of course, the market understands not much new information can come from the FOMC’s actual minutes. The Fed’s annual meeting at Jackson Hole this weekend, and the messaging from there, may therefore be of greater import. Irrespective, the risk is this: markets are betting big that the Fed will be cutting interest rates aggressively in the 12 months to tackle an expected slowdown in the US economy. If they fail again to deliver the forward guidance this week to back up this perception, stock markets could be in for another major shake-up.