Trader thoughts - The long and short of it

Fed sparks bullish sentiment

Traders were bullish overnight, but as far global equities go, the ultimate results were mixed. Activity has been very high, that’s irrefutable. Volumes flowing into stocks have been much higher than average, no matter where you look. Fundamentally, the Fed has lit a fire under markets, and traders are repositioning to adjust to a new set of circumstances. The fundamentals have shifted in quite a meaningful way. It’s the notion that the Fed will maintain monetary policy support that has made this so. A world of relatively easy monetary policy and loose financial conditions has market participants believing the record bull-run can be sustained. It may prove fleeting, merely a boost in sentiment, but at the very least today, markets have found their justification to buy-in.

Bond markets start to adjust

Look no further to rates and bond markets to see the true impact of what the Fed has done. US Treasuries had been a boring market to watch for most of January, at least when compared to the events of late 2018. The US 10 Year note had been less than a 10-basis point trading range. The ultra-dovish Fed yesterday morning put an end to that. Implied probability for a rate hike this year from the Fed has for all intents and purposes has now been erased. By the end of the year, interest rate traders see little more than a 1% chance that a rate hike will occur. US Bond yields have tumbled consequently, with the US 2 Year Treasury now yielding little more than current US Federal Funds rate.

The greenback smack-down

The USD is losing its advocates it seems. The pro-Dollar cheer squad espoused two reasons to justify their hitherto bullishness: if the economy regains its strength, then that means higher US rates, ergo a stronger greenback; if the economy goes into decline, that means greater risk aversion, ergo a stronger greenback. That idea is very cogent and could prove true in time, but here-and-now, the price action flies in the face of Dollar bulls. The USD is well off its highs, and although receiving a lift from a weaker Euro last night, a lift in our Australian Dollar (along with other risk-currencies) to above 0.7260 suggest traders are more than happy to short the greenback where it presently trades.

Global economic data shows further weakness

Which leads to the irony, or perhaps contradiction, in financial markets at-the-moment: global growth keeps showing signs of a synchronized slow down. A weaker global economy in 2019 is all but a given if you listen to the analysis of the global economic elite. Last night though, markets were delivered another dose of reality about what the “real” economy is up to. A truckload of macro-data was released yesterday, and though there were some solid numbers here-and-there, most of it was quite ugly. Canadian GDP figures showed a contraction in growth for the quarter, German Retail Sales data missed by a long way, Chicago PMI disappointed, Italy is entering a technical recession, and Chinese PMI figures remain in contraction territory.

Trade-war pain hurts Europe

It didn’t help sentiment toward global growth that US President Donald Trump decided to hit Twitter to discuss the trade war overnight. He said nothing inflammatory, in fact he was quite positive about trade negotiations. However, the US President made quite clear that a trade breakthrough couldn’t be expected until he and Chinese President Xi Jinping sat down to nut out the final details. Seemingly, European markets copped the brunt of that news, and it showed up in its currency and fixed income markets. The EUR was down across the board last night, as German Bund yields collapsed to a 2-and-a-half year low -- primarily as recession risks in the European economic bloc, and a subsequently idle ECB, forced traders to price-out the prospect of monetary policy normalization in Europe in 2019.

ASX 200 bucked the theme

Not that is represents much, but the to-and-fro between the optimism regarding a more dovish Fed, coupled with the grow anxiety elicited by slowed economic growth, has SPI futures pointing to a slim 5-point gain for the ASX 200 this morning. Defying the theme in global markets yesterday, the ASX 200 closed just shy of -0.4% lower for the session, sustaining most of its losses during the after-market auction. Notably once again, the index failed to break through stubborn resistance at its 200-day EMA, selling-off that point once more during intraday trade. Upside momentum is diminishing in the market in the very short term, but perhaps in favour of the bulls, an ascending triangle pattern has emerged in the price action, maybe signalling an upside break is building within the market.

The Fed, Hayne, and Iron Ore

The down day in Aussie stocks could be interpreted as a sign bearishness is gripping traders, but yesterday’s activity should be put into the context that the sell-off into yesterday close was probably symptomatic of a bit of end of month rebalancing in the market. Financial stocks are languishing too, as traders apparently stay out of the space ahead of Monday’s release of the final report from the Hayne Royal Commission. The beacon in the market has been the materials sector, owing to the recent rally in iron ore prices, following the devastating Vale disaster, which has thrown into question the safety (and therefore future productive capacity) of the mining industry in Brazil. To see a day in the green today, it may rely on mining bullishness outstripping banking-sector bearishness.