Markets trading in a lull ahead of a busy week

New week starts slow

A busy week is upon the markets; buts it's proven a relatively slow starter. News-flow and other event risk have been thin in the last 24-hours. The effect has been a night’s trade where markets have floated more-or-less in the same direction to which they were nudged at the end of last week. Global stocks performed relatively well – despite the lack of meaningful market-developments. US tech held a rally on Wall Street together, and European equities registered a positive performance. However, that was on below average volume, and the markets’ traded well within the comfort of recent ranges – and below key psychological levels.

ASX tracked Asian stock markets lower

Australian stocks broadly tracked their Asian cousins lower to begin the trading week. It was a simple matter of playing catch-up for Asian indices yesterday: market participants in the region had yet to re-price for Fed-speaker John Williams’ false alarm (or “academic exercise”, as the New York Fed spun it) regarding the need for aggressive interest rate cuts from the US Fed at the end of this month. For the ASX, it made for quite a high volume, but negative Monday, with a lift in energy stocks and the miners the only areas of the market holding the ASX 200 within its recent, comfortable range.

FX volatility remarkably subdued

Currency markets epitomized the night’s mundane trading. Long a problem anyway, volatility was very low across the G10 currency landscape. The EUR/USD, for one, traded in a very narrow 20-point range. The USD remained the outperformer as traders favoured the Greenback over the likes of the Euro and Pound, as markets prepare this week’s ECB meeting and the likely election of Boris Johnson as the UK’s next PM. The CAD and NOK pulled back as some of the recent upside in oil prices stalled, amid escalating tensions in the Middle East. While growth currencies like the AUD and NZD bettered the safe haven Japanese Yen.

Australian Dollar holding above 0.7000

The Australian Dollar continues to tussle with the USD, as traders balance the mixed signals of higher iron ore prices, fluctuating interest-rate differentials, and a global economic slowdown. Although conventional wisdom suggests a weaker global economic outlook ought to translate into a weaker AUD, a major expansion in Australia’s terms of trade, driven by a massive spike in iron ore price, as well as expectations for aggressive interest rate cuts from the Fed, has resulted in a short-term upside trend in the AUD/USD. The long-term trend is still pointing down, but a sustained break of the pairs 200-day EMA at 0.7100 could conceivably throw this dynamic into question.

The US Dollar’s Dilemma

Ultimately, as it often can be, the AUD “story” may find itself in a greater way determined by the fortunes of the US Dollar. Market participants are apparently split on the outlook for the USD. On the one hand, Dollar-bulls maintain that this impending global economic slow-down ought to drive capital into the Greenback, as safety and liquidity are sorts. On the other, Dollar-bears maintain likely US Fed cuts will diminish the interest-rate advantage US bonds presently possess and weaken the USD. The Dollar Index looks positioned to go either way: its upward trend has broken, but long-term momentum is yet to meaningfully shift to the downside.

Oil propped up by tensions in the Persian Gulf

Rallying oil prices kept the energy sector well-fed in the last 24 hours. Simmering tensions in the Strait of Hormuz, following the weekend hijacking by Iranian forces of a UK freight ship, is raising the material possibility of accidental conflict between Iran and the West. A disruption to crucial freight channels through the Persian Gulf will undoubtedly bring about an artificial lift in oil prices. But the broader trend in oil prices, and stocks tied to their strength, looks pointed still to the downside. The oil story now, overall, is a global growth story: and on the balance of evidence, global growth still looks to be slowing down.

Gold still glittering

Though pulling back from its 6-year highs to begin the week, gold prices remain amply supported to begin the week – and the effects are flowing into the ASX’s gold miners. Newcrest Mining touched an all-time high during yesterday’s trade, as the gold price in Australian Dollars held near record highs around $2050 AUD. Of course, while any new high invites calls for an imminent reversal, this trend for gold appears reasonably well supported in the longer-term. Expectations for imminent interest rate cuts across the global economy is feeding the pool of negative-yielding debt in international markets; while geopolitical tensions are forcing investors to seek safety.