Risk appetite moderates as trade progress hits impasse

Activity is high, but sentiment is still cooling, in markets

Risk taking in markets has settled, seeing a flatlining in Wall Street stocks overnight. The news flow was a touch negative, with reports suggesting that the US and China can’t agree on a time and location to sign a trade deal. The ASX200 is expected to lift this morning however, after what was a comparatively weak day yesterday for Australian stocks. Oil prices dipped, off the back of a bigger than expected build in US Crude Inventories. And the major focus will be on the UK economy today, as the Bank of England hands down its rates decision, and as the UK's election campaign gets underway.

Risk appetite diminishes as the trade-talk progress slows

One might suggest that risk appetite in global financial markets has been sated, for now. The burst euphoria that's seen a turnaround in the outlook for the global economy and financial markets has waned, with something of a moderation occurring currently. Wall Street stocks dipped last night, and safe havens recovered their losses, upon the release of news that cast doubt over the likelihood of a signing of a "phase one" trade deal between the US and China this month. Reportedly, disagreement remains over the matter of when and where such a trade-deal should be signed, with the Chinese reluctant to do it in the US.

Wall Street stocks trade flat, and safe havens lift

It’s a reminded that trade-negotiations certainly won’t be all smooth sailing from here. At that, some reasonably thorny issues are coming to market attention, like China’s demand to remove September’s tariff-hike before any deal proceeds. It was, generally speaking, this reality that curbed upside in risk assets and drove a rally in safe-havens last night. The S&P500 closed flat, in another high activity day. Government bond yields reversed some of their recent gains, with the yield on the 10 Year US Treasury note dropping 5 points. Gold prices also jumped by around 0.6%, and the Japanese Yen rebounded slightly.

ASX battling the consequences of stretched valuations

At least according to SPI Futures, the ASX200 ought to march to the beat of its own drum (again) this morning. That contract is indicating a 27-point jump at today’s open, following a day in which the ASX200 was a laggard across global stock indices. In essence, the broader ASX is battling with the consequences of higher bond yields, as traders price-in a better global growth outlook, and price-out (marginally) RBA rate cuts. The dynamic seems to be pushing already stretched valuations to a point that’s a little unattractive for investors right now – the result of which may be an ASX200 that struggles to reclaim its own record-highs.

Oil falls as inventories build, and the unlikeliness of OEPC cuts

Oil prices took a little spill overnight, courtesy of a trifecta of bearish news stories. The first, of course, pertained to the latest speedbump in the US-China trade war. But more fundamentally: US Crude Inventory data showed a much bigger than expected build last month, with inventories increasing to a around 7.9m barrels, against a forecast 1.9. And on top of that: reports last night suggested that OPEC members, ahead of a meeting next month, will not push for greater supply cuts to support global oil prices. Those developments saw Brent Crude prices fall over 1% last night, to erase most of the week’s gains.

Bank of England meeting to top the agenda today

The economic calendar is relatively light today. The focus will likely remain on tonight’s Bank of England meeting, at which the central bank will almost certainly keep interest rates on hold. Hence, the meeting will be about the BOE’s commentary – in particular, it’s revised views on what recent Brexit developments mean for the UK economy. This, after all, is the first meeting of the BOE since last month’s rapid turn of events that saw a Brexit deal agreed upon, and a general election called. Market participants will be following the BOE intently for clues about how it may approach a scheduled January 2020 Brexit.

The Pound likely to stay volatile as UK election campaign begins

The market remains quite optimistic that Brexit will materialize come this date. The Pound is still trading safely around the 1.28 level. And the odds of a rate cut from the BOE by next year has fallen from roughly 75% at the start of October, to 40% now. In the more immediate future, the Sterling may start to face some level of increased volatility, as UK pollies hit the hustings to begin the campaign for December’s General Election. Currencies typically dislike the uncertainty brought about by a looming election. Thus, some choppiness, if not slight weakness, in the Pound is being assumed.