Trader thoughts - the long and short of it

ASX: SPI futures are indicating a strong start to the day for the ASX200, which currently appears poised to open 25 points higher. This comes after a lacklustre day of trading for the Australian share-market yesterday, which closed the session effectively flat, despite a plethora of high impact events to trade-off. It was perhaps because of this that the market lagged so much: only an hour before the local market open, the US-EU trade truce, the resignation of Macquarie’s Nicholas Moore, the proposed merger between Fairfax and Nine, and the release of Facebook’s calamitous earnings update were all reported. Pulled in so many directions, the ASX fell markedly throughout the morning, only to breakeven late in the day’s trade to close at 6244.

ASX today: The news flow in global markets on balance should be supportive of the ASX, and as it stands currently that dynamic may begin to manifest early today. Energy stocks have performed consistently throughout the week thanks to the lift in oil and easing global growth fears; while the miners have added incrementally to gains following a boost to sentiment courtesy of Monday’s announcement of a Chinese stimulus package. The sector to watch today for the Australian share-market could be the financial sector – namely the banks – which haven’t responded to the positive story of rising global bond yields. With the ASX locked in a period of short term consolidation characterized by lower highs and sideways trading, look for the banks to fuel any possible tilt higher to end the week.

US Shares: Wall Street was mixed overnight, as traders balanced yesterday’s horrid Facebook earnings report with news that the US and EU may be backing away from a trade conflict. In what might be described as a reversal of fortunes, it was the industrial laden Dow Jones leading the charge yesterday, leaving behind the S&P500 and tech-heavy NASDAQ in its wake. The situation – that is, strong gains in the industrial sector and heavy casualties in the tech-space – is unlikely to persist for long into the future: the dynamic can be attributed to the bipolar response to the withdrawal of tariff threats on industrial goods from the US and EU on the one hand, and the historic plunge in Facebook shares on the other. However, it does highlight the highly volatile and therefore risky investment decisions faced by investors, in an environment of high uncertainty.

Facebook: Looking at the fortunes of Facebook and the tech sector, yesterday’s results cast a fascinating light on what has been one of the US share markets growth darlings in recent years. Contrarian investors have long proclaimed that the stretched valuations of Facebook and its tech giant counterparts are unjustified, and that an inevitable collapse in those companies must necessity eventuate. Despite these fringe views, the NASDAQ continues to hit record highs, as the FAANGs stocks shrugged-off the doubters to fuel its meteoric rise. Although far from proven correct, those doubters were somewhat vindicated yesterday, as Facebook reported lower than expected earnings, and — more worryingly — a downgrade in its earnings forecasts and overall user base.

Tech shares: It does show the challenge of trying to value some of these companies, particularly given their massive scale and esoteric performance metrics. It comes down to a fundamental question for investors about how these companies can monetise their service and do so in such a way that ensures sustainable growth. The other fallacy when looking at these tech companies is assessing them all through the same lens and tying their fortunes too closely to one another. These are issues that will not find a strong resolution any time soon, but considering the wreckage of Facebook yesterday, the reaction to quarterly reports from Amazon and (in particular) Twitter take on a fascinating shape.

ECB: The major fundamental data event last night was the meeting of the ECB, which of course announced no change to their monetary policy settings. It was tipped to be a non-event at the outset, and that suspicion proved true: the meeting’s accompanying press conference with ECB President Mario Draghi only ran for 40 Minutes - short of the usual one hour — during which the bank’s President reaffirmed his team’s commitment to gradually unwind stimulus, and intention to hike interest rates after the European summer of 2019. The whole story was judged by traders to have struck a dovish tone, prompting a sell-off in the EUR following several days of solid gains, and driving flows back in the USD, which reclaimed some lost ground following a week of losses.

US GDP: The week will come to an end this week with the release of some highly anticipated US GDP data. Amid growing global growth concerns, the US economy (at least according to some) is booming, with forecasters tipping a quarter-on-quarter growth figure of 4.2%. The data will likely inform a lot of policy makers and therefore the market’s thinking about the future path of interest rates in the US, which are tipped to increase a further two times this year. Though today’s release won’t change the outlook for rates in 2018, as the calendar year moves further into its second half, speculation about hikes in 2019 will become more relevant. The markets only feel comfortable pricing in fully the two hikes forecast in 2018, largely ignoring thus far the Fed’s call over a further 6 in the next 2 years, or so. If further hikes begin to be priced into the market, watch for activity in long term bond yields, and commentary relating to their impact on share-market strength.