Markets settle as news flow lightens, but bullishness remains high

Upside momentum in stocks slow, as news flow thins

Sentiment has cooled in global markets, but it undoubtedly remains positive. Trade-war news continues to be supportive of risk appetite, with a “phase one” US-China trade-deal looking all the more likely. US economic data has also fuelled growing optimism in the market. US stock indices traded flat-to-higher overnight, European stocks posted gains, and safe havens struggled, in a day’s trade which has been relatively light on high-impact news. The RBA’s meeting was arguably the most significant event, and they surprised very few by keeping interest rates on hold. The decision drove the Australian Dollar and Government Bond yields higher, and added a small head-wind to the ASX.

Further baby steps in trade-talks keep bullishness supported

Niceties keep being exchanged by the US and China, and that’s putting a platform underneath market bulls. Two stories added to the good-feelings yesterday. The first: that in response to Chinese requests, the US is amenable to the idea of removing the tariffs applied in September on Chinese, in order to lock-in a “phase one” trade-deal. The second: in a speech delivered to a trade expo, Xi Jinping confirmed his desire that “China will give greater importance to import. We will continue to lower tariffs…”. The news fuelled the virtuous cycle emerging in financial markets right now, as optimism regarding trade-war progress runs high.

US data allays concerns about economic slowdown

After several days of generally better than expected US economic data, ISM Non-Manufacturing PMI figures managed to add to hopes in the market of a turnaround in US economic activity. Soundly exceeding the forecast figure of 53.5, Non-Manufacturing PMI printed a robust and expansionary 54.7. The data eased further the fears of an economic contraction in the US, led by deteriorating business conditions. The US Dollar jumped as-a-result of the news, as traders lowered bets once again of any further Fed rate cuts in the near future. And the S&P 500 recovered an early dip, to trade flat for the session – and around its all-time highs.

Growth sensitive assets exhibit further signs of turnaround

Even more than in equity markets, price action in fixed income, currencies and commodities is conveying the view that the global economy’s slowdown is bottoming. Bond yields, for one, are climbing across the globe, with the yield on the benchmark 10 Year Treasury note on the cusp of breaking its multi-month downtrend. The USD is climbing as a result, and the Japanese Yen has “fallen” into the 109 handle against the Greenback. The AUD is also appreciating, though continues to wrangle with USD strength. Gold fell below $US1500 last night; and oil prices are grinding higher, while copper prices are attempting to sustain a turnaround in trend.

RBA keeps rates on hold: delivers few surprises

The RBA met yesterday, but delivered no big surprises. Interest rates were kept steady at 0.75% as expected. The signalling from the RBA wasn’t materially different either – and that probably contributed to the view the central bank is reluctant to cut rates again in the short term. The economy is “at a gentle turning point” but rates will probably remain low for an “extended period”, and can be cut “if needed” to support the RBA’s price and employment targets. That messaging ultimately lead to a slight unwinding of rate-cut bets from the market, with only a 50-50 chance now being given for another cut in 2020.

AUD itching to break higher; remains constrained by strong USD

Supported by greater risk-appetite, as well as the RBA’s policy guidance, the AUD/USD looks like its itching to break-out. Indeed, risks remain to the downside for the pair, and that’s a path the pair will take if US-China trade-relations deteriorate once again. But from a price perspective, the AUD/USD is flirting with its key resistance level at its 200-day moving average, just below the 0.6950 mark. The Aussie Dollar pulled back from that mark during North American trade, as the USD too shows greater signs of strength. But a definitive break above that moving-average would signify a considerable shift in momentum, and possibly further upside for the AUD/USD.

ASX still failing to capture optimism driving global equity indices

Relative to global stock markets, the ASX is something of a laggard right now. The strengthening AUD has certainly clipped upside for the local market. Valuations remain historically stretched, a dynamic which has been compounded by the rise in government bond yields, as improvements in global growth outlook and the lower odds of RBA rate cuts push domestic rates higher. 6770/75 is still the technical line-in-the-sand to watch: a break above that point would signal the will to drive the ASX200 to its own record-highs. Just for today, SPI Futures suggest that the ASX200 ought to open around 15 points higher.