Stocks plunge as trade-war and tariffs return to headlines

Stock markets tumble on return of tariff talk

Tariffs and trade-wars are back in the headlines, and have dominated market action overnight. That sent stock indices tumbling in European and North American trade. Sentiment could finally be turning, just in the short-term, following several weeks of irrational exuberance in equity markets. The negativity in global markets has come despite what was, overall, a reasonably solid day for economic data, that allayed some concerns about the global economy. Nevertheless, the ASX 200 is set up for some big losses at the open, too, as a consequence of the turn in sentiment, ahead of a day highlighted by the final RBA meeting for 2019.

An unofficial trade-deal “deadline”

Stocks indices in Europe and the US fell after US President Donald Trump hiked steel tariffs on Argentina and Brazil, and one of the President’s senior advisers, Wilbur Ross, suggested that tariffs on China could still be hiked yet, if a trade-deal can’t be reached between the two countries. Of most immediate concern to market participants, were Ross’s comments, who went as far as suggesting that the December 15 date, for which the next round of tariff-hikes are scheduled, could be a “logical deadline”. The comments seem to have scuppered sentiment, with European shares dropping 2%, and the S&P 500 losing 0.7%, overnight.

Brinkmanship could return to US-China talks

As this December 15 “deadline” approaches, brinkmanship may once again be the name of the game. The view about trade-talks is becoming quite “zero-sum” again, meaning both the US and China may well be angling at trying to use this “phase-one” trade-deal as a way of scoring a political win against the other. It’s not that this wasn’t always known, however the “trade-deal” narrative in the market had fed upon itself in recent weeks, driving equity market prices beyond what can be considered fair and rational, in the bigger picture. A reversal of this dynamic may be afoot now, as speculators go from bulls to bears.

Sentiment could be flipping in stock markets:

Not that this dynamic can’t be reversed again with a positive Tweet, or a “leaked” comment to some state-controlled media agency. However, what’s being observed now is classic, short-term market psychology: traders chasing the herd, and hoping they’re not exposed as the “biggest fool”. Afterall, valuations, positioning and sentiment was getting a bit too bullish. The ASX200 being a big case in point. It’s price action belies totally it’s fundamentals, with the Blended Forward P/E ratio as rich as its been this decade. So: a fundamental recalibration might be coming; and that’s setting up the local market for a big 90-point plunge today.

Bonds spike as Chinese, EU PMIs surprise

There’s a quirky little undercurrent moving markets too, and that’s the big climb in bond yields last night. Looking at stock market price-action, the spike yields is counterintuitive. Just for one, the US 10 Year Treasury yield is up 6 basis points, as markets price-in that the global economy ought to turnaround rolling into 2020. The impetus for this move was a spate of PMI data releases in the last 2 or 3 days – the most significant of those being China’s – that generally beat economist’s expectations. It’s feeding into the notion that the “manufacturing recession” has bottomed – and with it, so has the global growth slowdown.

US ISM PMI data misses, prompting Dollar sell-off

Now, there was a notable exception to the “positive-PMI” story yesterday, and that came from a miss in the crucial US ISM Manufacturing PMI data. That cooled the run higher in bond yields upon its release, and probably compounded the sell-off in stock indices in the North American session. The data also knocked down the US Dollar considerably, and re-introduced a level of volatility into the FX space that had been frustratingly absent in the market for several weeks. The combination of a weaker US Dollar and solid Chinese data has proven a benefit to the AUD, which leapt 0.9% last night.

RBA expected to keep rates on hold today

The day ahead will be highlighted by this afternoon's RBA meeting. The central bank is very unlikely to do anything with rates today, with traders pricing in a lower than 10% chance of a cut. Instead, this'll be a meeting likely spent determining the chances of when the next cut ought to occur. After last week's speech on "unconventional" monetary policy, traders moved to price-in a high chance the RBA will cut rates to 0.25% in 2020. The first step in that process ought to come in February: the market is ascribing a 60% chance of a cut at that meeting.

Stock markets tumble on return of tariff talk

Tariffs and trade-wars are back in the headlines, and have dominated market action overnight. That sent stock indices tumbling in European and North American trade. Sentiment could finally be turning, just in the short-term, following several weeks of irrational exuberance in equity markets. The negativity in global markets has come despite what was, overall, a reasonably solid day for economic data, that allayed some concerns about the global economy. Nevertheless, the ASX200 is set up for some big losses at the open, too, as a consequence of the turn in sentiment, ahead of a day highlighted by the final RBA meeting for 2019.

An unofficial trade-deal “deadline”

Stocks indices in Europe and the US fell after US President Donald Trump hiked steel tariffs on Argentina and Brazil, and one of the President’s senior advisers, Wilbur Ross, suggested that tariffs on China could still be hiked yet, if a trade-deal can’t be reached between the two countries. Of most immediate concern to market participants, were Ross’s comments, who went as far as suggesting that the December 15 date, for which the next round of tariff-hikes are scheduled, could be a “logical deadline”. The comments seem to have scuppered sentiment, with European shares dropping 2%, and the S&P500 losing 0.7%, overnight.

Brinkmanship could return to US-China talks

As this December 15 “deadline” approaches, brinkmanship may once again be the name of the game. The view about trade-talks is becoming quite “zero-sum” again, meaning both the US and China may well be angling at trying to use this “phase-one” trade-deal as a way of scoring a political win against the other. It’s not that this wasn’t always known, however the “trade-deal” narrative in the market had fed upon itself in recent weeks, driving equity market prices beyond what can be considered fair and rational, in the bigger picture. A reversal of this dynamic may be afoot now, as speculators go from bulls to bears.

Sentiment could be flipping in stock markets

Not that this dynamic can’t be reversed again with a positive Tweet, or a “leaked” comment to some state-controlled media agency. However, what’s being observed now is classic, short-term market psychology: traders chasing the herd, and hoping they’re not exposed as the “biggest fool”. Afterall, valuations, positioning and sentiment was getting a bit too bullish. The ASX200 being a big case in point. It’s price action belies totally it’s fundamentals, with the Blended Forward P/E ratio as rich as its been this decade. So: a fundamental recalibration might be coming; and that’s setting up the local market for a big 90-point plunge today.

Bonds spike as Chinese, EU PMIs surprise

There’s a quirky little undercurrent moving markets too, and that’s the big climb in bond yields last night. Looking at stock market price-action, the spike yields is counterintuitive. Just for one, the US 10 Year Treasury yield is up 6 basis points, as markets price-in that the global economy ought to turnaround rolling into 2020. The impetus for this move was a spate of PMI data releases in the last 2 or 3 days – the most significant of those being China’s – that generally beat economist’s expectations. It’s feeding into the notion that the “manufacturing recession” has bottomed – and with it, so has the global growth slowdown.

US ISM PMI data misses, prompting Dollar sell-off

Now, there was a notable exception to the “positive-PMI” story yesterday, and that came from a miss in the crucial US ISM Manufacturing PMI data. That cooled the run higher in bond yields upon its release, and probably compounded the sell-off in stock indices in the North American session. The data also knocked down the US Dollar considerably, and re-introduced a level of volatility into the FX space that had been frustratingly absent in the market for several weeks. The combination of a weaker US Dollar and solid Chinese data has proven a benefit to the AUD, which leapt 0.9% last night.

RBA expected to keep rates on hold today

The day ahead will be highlighted by this afternoon's RBA meeting. The central bank is very unlikely to do anything with rates today, with traders pricing in a lower than 10% chance of a cut. Instead, this'll be a meeting likely spent determining the chances of when the next cut ought to occur. After last week's speech on "unconventional" monetary policy, traders moved to price-in a high chance the RBA will cut rates to 0.25% in 2020. The first step in that process ought to come in February: the market is ascribing a 60% chance of a cut at that meeting.