Market activity subdued, as week begins to ramp up

The market still playing the waiting game

Markets continue to tread water as traders patiently await substantial news about US-China trade talks. Signs of heightened fear in the market is emerging, with volatility creeping higher since the beginning of the week. That dynamic saw the ASX 200 pullback yesterday. The business end of the week really approaches now. US CPI data is released, and is expected to show steady inflation in the US economy. The final meeting of the year of the US Federal Reserve takes place, and it’s expected to deliver a “hold” decision. While locally, Consumer Sentiment data is the key release, following on from yesterday's soft business confidence numbers.

Trade headlines lack bite as tariff “deadline” looms

There were trade headlines released overnight, just they didn’t appear to have much impact. The rationale is simple enough: why trade the headline when in a few days’ time you can trade the real thing? The trade-war news yesterday was a touch conflicting, and probably indicative of both the US and China trying to manipulate talks through the media. From China’s side, reports flowed that Chinese negotiators see tariff hikes scheduled for December 15 being delayed. From the US side, these reports were quashed by Trump trade-advisor Larry Kudlow, who suggested there remains no definitive decision on whether tariff hikes will go ahead, or not.

Risk assets weaker, as volatility creeps higher

The mixed signals, and overall sense of heightened anxiety, in global markets lead to another lacklustre day’s trade. S&P 500 traded flat, while European stocks generally dropped, on what was rather low activity. Despite this listlessness, there are signs that a touch of fear and uncertainty is creeping into the market, as the quasi trade-talk deadline looms. The VIX has held above the 15 mark in the past two days. Indeed, by historical standards, that’s not extraordinarily high. However, it is at a level notionally above what’s considered conducive to upside in risk assets, and reflects perhaps lower optimism about a positive trade-talk outcome.

ASX200 expected to open slightly lower today

The overnight lead is setting up the ASX 200 for a flat, to slightly negative, open this morning. It’ll come off the back of a day yesterday which saw the index drop, as market participants quietly moved away from riskier asset classes, ahead of several days of very high impact event risk. The losses in the market were broad-based, too, with breadth a paltry 20%, and all sectors bar one falling for the day. The sole outperformer: the mining stocks, which managed to sustain a solid 0.9% gain, courtesy of a recent run higher in the price of iron ore.

US Fed the opening act ahead of several days of big events

Market participants gear-up for the first lot of major global news releases in the day ahead. The US Federal Reserve meet for the final time in 2019, and are unanimously predicted to keep interest rates on hold. Hence, this meeting will be about gauging the Fed’s views on what to expect in the new year. Of greatest importance: the central bank will be publishing its famous “dot plots” – a broad view of the expected trajectory of interest rates going forward. Market participants are still thinking the Fed will remain accommodative throughout 2020; risk appetite will be stoked if the “dot plots” supports this view.

US CPI data expected to show modest uptick in inflation

Prefacing the Fed’s meeting: US CPI data will drop tonight, and is expected to show US inflation ticked-up on an annualized basis to 2.0%. Stripping out volatile energy and food prices however, and price growth in the US economy is expected to have remained steady year-over-year. US inflation risk is considered quite a low one currently. Implied measures of inflation indicate it ought to remain anchored around one-and-a-half % into the future. The inflation outlook is expectations for any possible rate hikes from the US Fed well in check, with markets welcoming the prospect of an extended period of low US rates.

More sentiment numbers to highlight local trade

The local calendar isn't quite as high impact today. But interest will be in Westpac Consumer Sentiment data this morning. The sentiment reading follows yesterday's NAB Business Confidence numbers, which showed weakening business sentiment within the Australian economy. The poor result was explained by a greater pessimism amongst the business community about the local economic outlook - a view founded upon ongoing concerns regarding weak consumer activity in Australia. Hence the significance of today's consumer sentiment data: it'll provide a sliver of insight on whether consumption in the economy is showing any signs of turning the corner in the near future.