Promises of policymaker support driving rally in risk-assets

Panic easing markets again

The panic that’s defined trade in global markets in the past few weeks continued to subside overnight. Risk and growth sensitive assets are rallying, and safe-havens are falling, as a series of sentiment-soothing news stories settle the nerves of market participants. The VIX dropped once again during Wall Street trade, to around 16, coming closer to the point that suggests fear is becoming contained in the financial markets. As a consequence, stock markets have climbed across the globe, with the S&P 500 rallying 1.20% last night. Global bond yields are creeping higher. The Yen is pulling back, as is gold. And oil prices have jumped.

Fundamentals no different, but hope remains for policy support

Nothing has quantifiably changed in market fundamentals yet. But a handful of stories is supporting the notion that policymakers will be throwing their weight together to arrest a global economic slowdown. Belief remains that central bankers will cut interest rates aggressively in coming months. The US and China are playing nicer with one another in the last few days. And there are signs that the typically-austere German government is preparing a big stimulus-package to combat a looming German-recession. One might argue the markets’ reaction to these stories is a triumph of hope over reason. Nevertheless, they’ve proven enough to see a slight arrest in downside momentum in global stock markets.

ASX showing tentative signs of turnaround

The ASX ought to edge higher this morning courtesy of Wall Street’s lead. Though there’s a litany of reasons why it might be considered misguided to become too cheerful about the market’s position right now, Monday’s trade for the ASX 200 was undoubtedly a good one. The steepening of global yield curves lead a rally in the banks. A pop higher in oil prices supported the energy sector. And Real Estate stocks caught a bid as evidence mounts of a turnaround in Australia’s East-coast property market. In the broader-scheme of things, momentum is skewed to the downside still. But maybe the tide in sentiment is turning a little. Afterall, a trend reversal, irrespective of the time horizon and its longevity, has to start somewhere.

RBA Minutes tops the data docket

The release of the RBA’s Monetary Policy Minutes for this month’s meeting will highlight the local calendar today. In short: as it has been since the July interest rate cut, all RBA news revolves around the question of when do they cut next? Given the RBA’s decision to keep rates steady this month, the focus for market participants will be fleshing out the central bank’s forward guidance. Within the press release published with its “hold decision” this month, the RBA stated it is poised to cut interest rates “if needed”. Markets will be looking to qualify under what circumstances a rate cut may indeed be “needed”.

The risk to the RBA’s outlook

The core issue is still “spare capacity” in the labour market. That problem, practically by the RBA’s own admission, isn’t going anywhere, anytime soon. However, the thread that ought to be followed is what factors could accelerate or decelerate the soaking up of this slack in the jobs market. Domestic consumption and “trade and technology” disputes – i.e. the trade-war – are the biggest, according to the RBA. The bank seems to think the former shall gradually improve over time. But the big uncontrollable issue is the trade-war. It’s taken a nasty turn since the RBA met last, so investors will be judging the central banks views on the matter in that (dimming) light.

Markets still betting the cash rate goes to 0.50%

Such is the nature of central bank policy making nowadays – what with the highly integrated nature of the global economy – the RBA is increasingly looking beyond, or perhaps bending, its traditional mandate to manage the country’s economic health. As a result, the outlook for Australian interest rate settings has been far more sensitive to global developments than domestic ones in recent times. The global economy is slowing down, almost unequivocally. This has led traders to maintain their bets that the RBA will be cutting 2 more times from where rates are now – the first likely in October, the next by January next year.

Aussie Dollar missing out on the relief rally

The Australian Dollar will be of interest to traders today – both because of the broader macroeconomic-environment, and the RBA’s minutes today. For all the hope engendered, to begin the week, that things aren’t that bad in the global economy, the AUD certainly has not received the cue. While surprise bursts of optimism and surprise rallies in growth sensitive markets aren’t foreign in the financial world at-the-moment, the weight of evidence seems to suggest upside in the AUD will remain stifled for some time. Afterall, the RBA is cutting rates, the USD is bubbling like a dormant volcano, and iron ore prices are retracing from their recent highs.