Volatility spikes, risk-taken off table, as Trump fans trade-war fears

Risk appetite evaporates as traders flee to safety

Volatility has returned in a big way to financial markets. Stocks are down and safe-havens are finding a bid, after US President Donald Trump last night suggested there’s “no deadline for a trade-deal”, and implied the trade-war could be prolonged into next year. Equity markets are returning to fundamentals now. And the lead is setting up another painful day for the ASX 200, which plunged over 2% yesterday, itself. That sell-off in local equities was compounded slightly by the RBA’s decision to hold rates steady yesterday. And the local economy will remain of high concern, as the markets prepare for today’s release of local GDP data.

The fear index spikes as sentiment shifts in markets

After several weeks of what’s been appropriately described as a sense of complacency, volatility has returned to global markets to begin December. Having been highly suppressed, as traders became giddy on the prospect of a US/China trade-deal, the VIX (the “fear index”) has spiked in the last 48 hours, climbing from a historically low 11 reading, to its current reading at 16. A part of this is just volatility shorts getting squeezed, and market positioning rebalancing. But fundamentally, the excessive bullishness that had characterized trade in markets for the better part of two months is evaporating, as traders take a cold, hard dose of reality.

Back to reality for the market, as trade-war truths bite

What that reality is: that the prices of risk assets had moved far beyond their fundamentals, and that the “trade-deal” narrative that was being used to justify that dynamic has proven a bit of a furphy. The issues keeping the US and China apart on trade have been laid bare once again, proving that the trade-war is merely a battle in a much larger conflict. The news last night that exposed this truth came from US President Donald Trump, who suggested that there is “no deadline” for a trade-deal, implied tariffs could still well be hiked this month, and hinted trade-talks could extend beyond next year’s election.

Price action in markets “risk-off” – with some exceptions

The price action in global markets has been risk-off – albeit, with a few quirks here and there. Stocks are down, as the fundamentals shift, and momentum chasers switch their directional bias. Bond yields have tumbled, as traders look for safety, and re-evaluate the outlook for global growth. The fall in yields has given a new lease on life to gold, which has jumped 1%. The Japanese Yen has climbed, but strangely, so too has the A-Dollar, which seems to have benefitted from the combination of a sell-off in the USD, as well as an unwinding of rate cut bets from the RBA in 2020.

ASX200 set to plunge again, following yesterday’s belting

The risk-off tone to trade is setting the ASX200 up for a drop at the open, backing-up yesterday’s big sell-off. SPI Futures are pointing to a roughly 60 point fall this morning, following yesterday’s considerable 2.3% tumble. It was simply a day to get out of Australian stocks yesterday, with volumes very high in the market, and market-breadth a measly 5%. Like stocks markets across the globe, the sell off was in essence the nasty combination of a major shift in sentiment, coupled with a market that had become way to expensive. A moderation is afoot currently, as fundamentals assert their gravity.

RBA pours water on the notion of imminent rate cuts

On top of the global-macro headwinds confronting Australian stocks yesterday, the ASX also found disappointment is the RBA’s meeting yesterday. Recall: last week’s record highs for the ASX200 was founded upon the notion the RBA may well be cutting interest rates twice in 2020. Though that view broadly remains the prevailing one, the RBA provided little confirmation that that’s what it plans to do with policy next year. The economy is still, according to the RBA, at a “gentle turning point”. And although an extended period of low rates should be expected, the RBA is still forecasting that unemployment and inflation will pick-up in the years ahead.

Australian GDP data will be the headline story today

The RBA’s commentary saw a reasonably big lift Australian government bond yields yesterday, especially at the front end of the curve, as traders reduced their expectations for rate cuts in 2020. That kept the Australian Dollar afloat, even in light of a day that should have seen it smacked down. Heavy focus remains on Australian economic growth today, with the release of local GDP data this morning. The results are forecast to be a little sobering. Annualized growth is expected to come-in at a well below trend 1.6%. An undershooting of this figure will put RBA cuts back under the spotlight.