Sentiment continues to improve, as traders gear-up for ECB meeting

Stocks climb, bonds settle, as risk-events move into sight

Stock markets moved higher last night, as the adjustment in global government bond markets eased. Wall Street stocks were over half a per cent higher, backing up a solid day for European bourses, which managed to add roughly 0.5 to 1.0 cent in their sessions, generally speaking. The ASX 200 ought to open 19 points higher today as a result. The bullishness is being encouraged by further optimism about the trade-war, as well as the belief that global central bankers are on the cusp of beginning a major rate cutting cycle. The week reaches its business end now, with US CPI data and the European Central Bank meeting highlighting the calendar tonight.

Australians feeling a little pessimistic

But first: locally yesterday, Westpac’s Consumer Sentiment survey was the headline economic release yesterday. It revealed, perhaps, a disappointing result: sentiment went in reverse again last month, and pessimists outnumber the optimists in Australian right now. Their big concern: the weaker outlook for the Australian (and global) economy. The result comes, too, despite recent efforts by policymakers to support households – via tax-cuts, rate-cuts and easier lending standards. Though these measure may soon turn sentiment around, this month’s consumer-reading does show the core policymakers fundamental concern: stimulus can be plied to no end, but if it can’t awaken consumers animal spirits, then it could all prove quite ineffectual.

Markets betting on fewer RBA rate cuts in 2019

Despite what is a dim state of affairs for Australian consumers – and perhaps, by extension, the Australian economy – right now, interest rate market pricing has actually reduced the implied chances of future RBA rate cuts. To be clear: rate cuts are still coming. But the market has revised how aggressive the RBA ought to be in cutting interest rates, and how soon that those interest rates will occur. Market pricing is suggesting that the RBA will only cut one more time before year end, most likely in November, before holding off until 2020 to make any further move.

Australian Dollar popping

AUD is experiencing somewhat of an uplift by virtue of this change in RBA rate cut expectations. That, along with this slight tempering of fears this week about the likeliest trajectory of the trade-war and the global economy. Like anything in global markets at present, the broader for the AUD/USD hasn’t changed, and remains to the downside. However, in the short-term, and as sentiment rebalances and investors reposition, a small pop in the currency might be afoot. Ultimately, the key line in the sand for the AUD/USD looks once-more to be the pair’s 200-day EMA at roughly 0.7005.

Oil prices fall on OPEC report and thawing US-Iran relations

Oil prices took another spill overnight. The cause was twofold. First, at its meeting overnight OPEC, announced a downgrade to its oil demand forecasts for 2020, citing the slow-down in the global economy for its change in outlook. Second, in a typical Trumpian-twist, perhaps pulled from the pages of the Art of the Deal, it was leaked that US President Trump is planning a meeting with Iran President Hassan Rouhani to discuss easing economic sanctions. The combined effect of those stories raised questions about both the demand and supply side ins oil markets. That manifested as a 2% fall in Brent prices last night.

Tonight’s ECB meeting the major event…

The marquee event in global financial markets for the week occurs tonight. The European Central Bank will meet, and will likely cut interest rates from -0.40% to -0.50%. So certain are market participants of this outcome, that the cut is already completely priced-in. Hence, tonight’s meeting will be all about future policy from the ECB, and that boils down to one question: will the ECB once again embark on a massive QE program to revive the anaemic Eurozone economy? The answer to this question is much less-than-certain. But it’s one financial markets participants are likely hoping is answered in the affirmative.

… but US CPI to be closely watched, too

Market participants will roll-on from the ECB meeting and move straight to digesting US CPI figures, tonight. Headline CPI is expected to show price growth in the US economy of 1.8% year-on-year last month. The more telling core CPI figure is expected to print a more robust 2.3%. It’ unlikely that tonight’s US inflation data will change market attitudes towards the US economy much. Implied measures of future inflation still point to US price growth well below 1.5%. But it could impact the timing of the next Fed cut after the one that’s likely to arrive next week.