Equity rally retraces, ASX to open slightly higher

ASX200 to open higher

The ASX 200 ought to add 5 points at this morning’s open, following what was an all but flat day for Australian stocks yesterday. It was really a rather negative day for global equities, especially in Asia, as concerns slowly build once more about the state of global economic growth. Volume was again quite high on the ASX, and breadth relatively strong, likely indicating a general resilience in Australian equities. But some large-cap stocks underperformed yesterday, stifling upward momentum in the ASX 200: the banks underperformed, with financials sapping 15 points from the index, while CSL alone was responsible for a 7-point loss on the index.

Miners climb with iron ore

The materials sector was a major outperformer on the ASX yesterday, adding 24 points to ASX 200 index. And of course, it was the sustained run-higher in iron ore that has fundamentally underpinned the gains. The iron ore price rallied by as much as 3% yesterday, belying action in broader commodities markets, on news that Chinese policy makers would be permitting local governments to increase infrastructure spending within their economic regions. The news has added further fuel to the multi-month surge in iron ore prices, which remains well supported by major global supply side concerns, and what is currently massive Chinese steel production.

Gold remains bid

Another commodity showing its muster currently is gold. Having failed another attempt at breaking through $US1350 last week, the yellow metal’s price remains hovering a trifle below that mark, seemingly constrained by large technical factors. The fundamentals, however, are shaping as very gold-positive. The price of gold has formed a strong correlation to – and greatly benefited from – the growing swathe of negative yielding debt trading in global financial markets. And given the prospect of ongoing economic uncertainty, and the likelihood that global central banks will be cutting interest rates the world over in response, it’s a relationship and trend that looks likely to persist.

Markets bet on rate cuts

That general prognosis remains wedded to the view that bond markets will continue to rally. For now, that impulse has abated; but looks unlikely to diminish. And that’s because for global financial markets, central bankers – especially those at the Fed – have once again painted themselves into the corner on global interest rates. A vicious cycle looks like it could be forming, similar to that which was seen in Q4 last year: risk assets are rallying on the basis the Fed will be cutting interest rates; if the Fed fail to do so, stock-markets will tremble, probably forcing the Fed to cut rates in response, anyway.

US CPI misses

Overnight, at least, the case for looming rate cuts from the US Federal Reserve was only bolstered by the release of US CPI numbers. By no means a shocking print, it did come in weaker at about 2.0% year-on-year, adding to the notion that disinflation pressures within the US economy are less “transitory” and a little more “anchored” than previously thought. 5 Year US Breakevens are currently trading at a paltry 1.5%, and trending lower, as interest rate markets up their bets, to an around 95% probability, that the Fed will be cutting interest rates at their July meeting.

Wall Street retraces

Despite this dynamic, US stocks, following a weak Asian and European lead, meandered last night, with the S&P 500 dropping just shy of 0.3%. The financials sector was the big underperformer, likely inhibited by a fall in global bond yields, while US tech shares also retraced some of its recent gains on diminishing risk-appetite. News yesterday that US President Trump was unilaterally holding up trade-talks with China, embittered by what he sees as China’s deviation from the original parameters of negotiations, quashed hopes for a de-escalation of the trade-war, and prompted flows out of risk-assets and into safe-havens.

Australian labour market in focus

Today, Asian trade will be highlighted by the release of Australian labour market data. Still fresh from last week’s RBA rate-cut, traders will be looking closely at today’s employment figures for signs as to whether the stubborn “spare capacity” in the labour market oft-cited by the RBA remains an issue. If the situation is seen to be getting worse, as a recent tick-up in unemployment in the Australian economy suggests, there remains room for some significant re-shuffling in rates markets and the AUD. Markets only have implied a fifty-fifty cut from the RBA at their next meeting – odds that could conceivably increase if employment data misses today.