Trader's View - Stocks continue to fall, as bonds keep rallying

The bears keep circling

The stock market got on with its sell-off overnight; and the bond market is still rallying. The concerns about the trade-war and global growth have sucked momentum from global equities, with the word “recession” bandied around amongst the commentariat quite prolifically. That’s certainly the alarmist’s view at-the-moment, and should always be taken with a hefty pinch-of-salt. But if nothing else, in the echo-chamber that is the day-to-day financial market punditry, it certainly speaks of sentiment in the market that’s been flipped on its head: the price-action certainly suggests, on the surface, that market participants are preparing for a global economic slow-down.

A more moderate approach

Rather than leaping straight to the conclusion that this sell-off implies catastrophe, perhaps a more moderate perspective can be posited. Yes, there’s less to be optimistic about in the global economy currently. But the drawdown in stocks and the rally in bonds might more accurately be attributed to another dynamic. Traders are betting on aggressive interest rate cuts from the world’s major central banks, and that’s manifesting along the yield curve. Momentum has been sucked from equity indices; however, given the rally in indices across the globe has been driven primarily by momentum-chasing-flow, this wave lower could well be symptomatic of an exit of speculative-funds from the market.

S&P500 completes its head-and-shoulders

The S&P500 has roundly completed its head and shoulders pattern, and as everyone had been waiting for, that index has duly tumbled after it broke the structure’s neckline, and support level, at 2800. The price action was largely representative of what occurred throughout global equity markets in the past 24 hours. Asian stocks were down, the FTSE 100 gave-up 1.15% in its session, and the DAX shed 1.57%. The S&P 500 is experiencing significant downside momentum now, too. Granted, that index has finished its day well off its lows, technical indicators are revealing a market controlled by the sellers, and vulnerable to more downside.

Bonds rally on Fed-cut bets

Flow from stocks has made its way into bond markets, as a flight to safety to safety clearly gets underway. US Treasuries have been the logical beneficiary, pushing yields down across the curve. A phenomenon which is manifesting in several corners of global markets, the yield on the US 10 Year Treasury note, at 2.26%, has pushed further below US overnight-cash-rate of 2.39%. It comes as market participants bet-big on US Fed cuts: a full rate cut from the Fed is priced-in for December, while markets are giving a 90% chance a cut will come by October.

US bonds the best of the bunch

Despite the fall in US Treasury yields, the safe-haven appeal of these assets have bolstered the US Dollar. The Greenback is up practically across the board, aided by the relative lack of appeal of holding other “safe” government debt. For example, yields on 10 Year Japanese Government Bonds have plunged to -0.10%, while the equivalent German Bund is even lower at -0.18%. The natural consequence of this has been a dip in the JPY and EUR, and a climb in the US Dollar Index. The DXY has rallied back above the 98 handle, and looks poised to challenge fresh multi-year highs.

The AUD and RBA

The stronger greenback, as well as a fall in Australian Government Bond yields, has spelled ill for the Australia Dollar last night, though it must be said that the little-battler is holding firm onto the 0.6900 handle. Speaking of inversions, the yield on 10 Year AGBs has also fallen below the cash-rate of 1.50 per cent. Expectations for interest rate cuts from the RBA are even more aggressive than that for the US Fed. Markets are giving and 85% chance the central bank will cut the cash rate next week, with two-and-a-half cuts being priced in before the end of 2019.

The day ahead for Aussie markets

That will keep pressure on the Australian Dollar in the medium term, and likely keep in tact the currency’s long-term downtrend. In the short-term, however, AUD traders cast their eyes to two major data releases from ABS today: Australian CAPEX figures, and Building Approvals data. Though those data-points pale in comparison to the general risk-off tone in markets, as well as positioning for next week’s RBA meeting, a marginal impact on general sentiment is likely from both releases. It will be the headline, at least, for the trading day, for which SPI Futures are pointing to a 30-point drop for the ASX at the open.