Trader's Thoughts - Bond markets flash warnings of slower global growth

Not with a bang, but with a whimper

Without all the fire and fury that we saw in December, markets are pricing in once again a slow down in global economic growth. It could be strongly argued this is evidence of how important US Fed support is to equity market strength, but that’s a drum to beaten (over-and-over-again) for another day. Fundamentally, traders are quietly re-pricing for a world where economic growth will be weaker than once thought. Such behaviour has been long evident in Chinese markets, so there’s nothing new about pessimism in the Asian region. The point of focus now is in Europe, and to a lesser extent North America, which is increasingly demonstrating signs that market participants believe those economies are briskly approaching a period of (even) lower rates, growth and inflation.

The many facets of the global growth story

There’s no shortage of causes for this looming slowdown – and in the financial media, each one is getting a good exercising. The trade-war remains the popular one, which is providing a convenient explanation for the confluence of confusing and complex causes for China’s recent economic malaise. This thread gets pulled-on to describe why Europe is feeling the pinch too, being the geography wedged in the middle of the trade-war’s heavyweight combatants. Throw in a sprinkling of Brexit anxiety and internal political unrest in the continent and that’s the story driving Europe’s economic outlook. The US economy is still humming, and the data coming out of the states is still showing a robust economy. Nevertheless, price action says that’s being somewhat ignored, with yields betraying an underling anxiety about economic health.

What the bond market is saying

Essentially, it’s all written in yields at present. A few unwanted milestones were achieved in bond markets on the weekend. The most significant was in German Bunds, which saw the yield on its 10-year fall to 0.08% – it’s lowest point since 2016 – even though rates markets leaving unchanged the implied probabilities for ECB decision making in 2019. 10-Year Japanese Government Bonds are back below 0%, as markets stay resigned to the fact that the Japanese economy will see no signs of inflation for the foreseeable future. And despite there being an absence of data impetus to cause this – other than a general “risk-off” tone for Friday’s trade – US Treasuries climbed as traders priced in the increased chance the Fed will cut rates this year.

The RBA adds its 2 cents worth

The market’s central premise that interest rates will need to fall the world-over manifested just as clearly in domestic trade on Friday. The RBA’s Statement of Monetary Policy, released on Friday morning, delivered to markets the material to price in further downside risks for local rates. Following the central bank’s meeting on Tuesday last week, and RBA Governor Philip Lowe’s influential speech on the Wednesday, it’s perhaps a surprise that anymore dovishness from the RBA could be priced into the forward curve. Lo-and-behold, there was, with the immediate reaction from markets towards the RBA’s SOMP to increase rate-cut bets in 2019 to over 60%, bid higher Australian Commonwealth Government Bonds, and to sell-out of the Australian Dollar – pushing the local unit below the 0.7100 handle, subsequently.

The RBA’s take on economic growth

It was another softening of the RBA’s economic growth outlook that spurred the flurry of activity. The SOMP was far from a manifesto of doom-and-gloom. However, what markets have for a while been predicting came clearly in the RBA’s opening lines of the document: “GDP growth slowed unexpectedly in the September quarter… The Bank’s growth forecasts have been revised down in light of recent data, particularly for consumption. GDP growth is expected to be around 3% over this year and 2¾% over 2020.” There was plenty of good news contained within the SOMP, it must be stated, especially as it relates to the outlook for the labour market. Sentiment clung to the growth outlook nevertheless, as traders assessed how a global economic slowdown will manifest down-under.

The ASX followed global equities lower

The fall in yields on ACGBs and the Australian Dollar proved once again supportive of the ASX 200, but the effect was fleeting. It was a bearish day for the ASX on Friday, no matter which way you spin-it. It was simply one of those days for risk assets, as the bulls took themselves to the sidelines for a breather, at the end of a week which was -balance very good for stocks in Australia. Equity market strength throughout last week was perhaps lacking in other parts of the world: Wall Street finished its week higher by a very slim margin, equity markets in continental Europe shed over 1% across the board, the Nikkei dropped over -2.00%, while a weaker GBP kept the FTSE in the green.

Price action for the ASX 200

The last traded price in SPI Futures is pointing to a 4-point drop at the open for the ASX 200 this morning. The market demonstrated some signs of short-term exhaustion on Friday, after its face-ripping rally earlier in the week, as higher than average volumes propelled the index higher. Resistance at ASX 200’s September low at around 6100/05 was dutifully respected as the week’s high. The daily-RSI is still in overbought territory, though not flashing a sell-signal nor a major change in momentum yet. The week’s break of the 200-day EMA is seeing that moving average slowly turn higher, which bodes well for the bulls. In the immediate future: the long-awaited pullback could be upon us here, with the November high at 5950 the next logical support level to watch.