Traders treading water ahead of major event risks

A cautious and quiet start to the week

It was a quiet and cautious start to the trading week in global markets. There's an apparent reluctance to commit to any major moves amongst traders, ahead of a risk-laden week. Price action has pointed to something of a mixed-Monday, sentiment wise, with market participants primarily spending the day digesting conflicting growth signals out of the US and China. The day was positive for the ASX; however, yesterday's gains are looking vulnerable today, judging by futures markets. Overall, markets may well be stuck in a tight holding pattern for a few days, as traders weigh the bull and bear cases from this week's several event risks.

News flow dominated by conflicting growth data

North American and European equities fell last night, and safe-haven assets generally climbed, in what was a tepid day’s trade in global markets. Activity was rather light, with traders generally spending the day digesting two pieces of largely conflicting news-stories concerning global growth. The first, the bumper US jobs numbers on Friday, that galvanized confidence in the market regarding the health of the US economy going into 2020. The second, Chinese trade balance data, which revealed a surprise fall in exports, and reminded the market that China’s economy is still feeling the ill effects of its trade-war with the United States.

ASX200 to open flat to slightly lower

The ASX primarily traded on the rosy sentiment associated with the first of those two stories. Though today, SPI Futures are suggesting the benchmark index will trade back in line with the so-so trading conditions in global markets. The Aussie stock market managed to consolidate, sightly, above the 6700 level, as the market looks to reclaim the losses it sustained last week. The energy sector was the relative outperformer, following the price of oil higher, which has been spurred in recent days by OPEC+’s commitment to cut oil production in 2020, to combat a looming crude over supply in the global economy.

Markets primarily concerned with upcoming event risks

Fundamentally, outside the daily vagaries of the market, the core concern for market participants is weighing the risk and rewards associated with the numerous events approaching on the economic calendar. The Fed and ECB meetings; the UK General Election; the “will-they-won’t-they” US-China phase-one trade deal: all have profound implications for the market right now. Traders are taking a pretty optimistic view on all of these issues, too. Central bankers are expected to remain positive but accommodative; the UK Tories are forecast to win a clear mandate for their Brexit deal; and the US and China are anticipated to strike a deal, and delay this week’s tariff-hikes.

Traders optimistic of a positive outcome to the week

Arguably, markets are primed and positioned for the most realistic bull-case from this week’s events. Of course, the best outcome of all would be some magical disappearance of Brexit and the trade-war; and, for some bizarre reason, a surprise easing monetary policy conditions. But that’s a utopian, fantasy land for investors. However, given the parameters, traders seem to believe that the market’s risk is skewed to the upside. If things go to plan, then a modest “risk-on”, “Santa Clause Rally” might be in the offing for stock markets. The outlook for global growth going into 2020 ought to modestly improve too.

Markets wishing for a Santa Claus rally

Given the good news is practically baked in, risk is probably a touch asymmetrical, meaning the moves in the market will be bigger in the event of a downside-surprise. Nevertheless, there’s likely still scope for greater bullishness should the markets get its way this week. That could see stock markets rally to new record highs. Oil, copper and growth sensitive commodities would probably push higher. gold prices would fall back into the mid-1400s, as global bond yields climb, and yield curves steepen. The Japanese Yen and Swiss Franc would fall, probably with the USD, too, as the Pound (and likely the Euro) find buyers.

Volatility would spike if things don’t go to plan

If worst-comes-to-worst, and the central bankers are a little too on the hawkish side, the Tories fail to win a majority government, and the US and China hike tariffs on one another’s economy’s, then the result would be drastic. Volatility would spike and stock markets would tumble. Yield curves would flatten as investors price in weaker global growth. Commodity prices would plunge, but gold would probably fly into the $1500s again. The Yen and Swiss Franc would rocket, the USD would likely trade marginally higher, the Pound would begin a foray into the mid-1.20s, and the AUD would begin a grind towards 66 cents.