Stocks rise on Brexit hopes and US earnings

Market sentiment still strong

Risk appetite in financial markets remains strong, as the after-glow of Friday’s US-China trade-truce lingers, and despite some dour assessments of the global economy by several financial leaders overnight. Sentiment is certainly being supported by growing talk a Brexit-deal is realistic and imminent – that’s of course sent the Pound flying. Market prices have swung significantly as investors re-evaluate the outlook for global economic activity, and that’s perhaps manifesting most acutely in gold. Locally, the RBA minutes confirmed yesterday that further interest rate cuts are on the cards, but provided some very clear qualifications on how effective lowering rates from here might be.

US stocks rally as earnings season starts strongly

Equities rallied in North American and European trade. The optimism elicited by Friday’s US-China trade-détente is evidently being held onto tightly, even in light of several stories this week that suggest the Chinese are insisting on tinkering with the deal somewhat before putting pen-to-paper. In perhaps what’s a sign of where investors are turning their attention, the S&P 500 jumped back above the 3000-level last night, after several of America’s largest banks reported earnings. The results were a mixed back. But beats from JP Morgan and Citigroup, and a slight miss from Goldman Sachs, proved enough to get reporting season off to a satisfactory start.

Economic leaders warn about global economy

The devil was in the detail of last night’s trade on Wall Street. Several high-profile financial institutions sounded warning bells about the outlook for the global economy. A handful came from bank leaders, with Jamie Dimon, the CEO of JP Morgan, for one, suggesting that though he expected the US and global economy to remain in expansion, there are signs of recessionary forces in the US economy right now. Of greater import, was the IMF’s update to its global growth forecast. The Fund downgraded its growth forecasts to 3% this year, citing trade and geopolitical tensions as being the primary cause for this slowdown.

Markets positioning for Brexit-breakthrough

In this vain, one geopolitical issue is being viewed with greater optimism at-the-moment, as Brexit negotiations seem to be continuing to progress. Headlines shouted last night that “EU, UK negotiators are closing in on draft Brexit deal”. The story has added to a slew of positive developments in Brexit-talks in recent days, fuelling another rally in the Pound above the 1.27-mark. There remains great scepticism about whether any deal will be palatable enough for the UK Parliament to pass it into law. Fortunately, markets won’t have to wait long to find out: the deadline to strike a deal imposed by the Benn Act arrives on Saturday.

Gold prices fall as sentiment improves

The Brexit news also contributed to a robust night’s trade on equity markets. Even though there’s been no data to support it yet, and there a warning-calls being announced from several quarters, markets are adopting a categorically risk-on attitude. Perhaps, the price-action in gold represents this shifting attitude. It’s price fell 0.8% to $1480 last night, tracking the (modestly) shrinking pool of negative yielding debt in global financial markets. Gold prices have been primarily determined by the fluctuations in bond yields this year. If optimism in the markets can remain elevated, then the course for gold in the short-term may be to the downside.

RBA minutes show further cuts required

The local news flow yesterday centred around the release of the minutes from the RBA’s most recent meeting, at which, of course, the central bank cut rates to a fresh all-time low. With the dominant view that the RBA will be forced to keep cutting rates in the future as the Australian economy remains sluggish, market participants were perusing the document for signals as to when the next cut might occur. Though no clear hints were made, the RBA suggested, again, that it’s “reasonable to expect that an extended period of low interest rates would be required in Australia to reach full employment and achieve the inflation target”.

Are rate cuts losing their punch?

That lead to an increase in the expectations for another rate cut from the RBA before year end, and a consequent dip in the AUD, during Asian trade – a move that was unwound overnight as the optimism relating Brexit took hold of market sentiment. What was particularly curious out of yesterday’s minutes, was the RBA’s discussion on the efficacy of fresh rate cuts. While hardly throwing up a white-flag, the central bank acknowledged that lowering rates may be less impactful than it’s proven to be in the past. And, perhaps, it could even be somewhat counterproductive, by making consumers feel less confident about the economy.