US NFPs disappoint, central bankers to the rescue, geopolitics the biggest risk(s)

Last week sees market sentiment turn

Stock markets rallied last week, and safe-haven assets pulled-back, as hopes of a de-escalation in the US-China trade-war stoked investors’ animal spirits. Indeed, it’s largely a sentiment shift. There was little information out last week that suggested a turnaround in fundamentals. But whenever a degree of uncertainty is alleviated in financial markets, it’s bound to stoke some level of risk-appetite. Wall Street did demonstrate a tempering in enthusiasm on Friday night, it must be said, closing the session’s trade more-or-less flat. That’s set the ASX 200 up for a weak open today. Nevertheless, short term momentum has become skewed to the upside, ahead of another jam-packed week.

US jobs numbers disappoint

There was good reason for Wall Street’s tepid day’s trade on Friday, too. US Non-Farm Payrolls data was released, and revealed what was probably, on balance, a soft set of numbers. They weren’t diabolically poor, by any means. There were no grave proclamations that a US recession is imminent by the punditry after the release. Irrespective, with a jobs-change number at roughly 130k, against a 160k forecast, the NFPs affirmed in a small way that the US economy ain’t quite as strong as it used to be. US Yields dropped with the Dollar, while stock markets teetered, as investors opted to briefly step-away from the recent risk-on rally.

US Fed Chair reassures markets

Perhaps some of the reason why the reaction to the weak NFPs was rather muted owed to US Fed Chair Jerome Powell’s speech on Friday night. Slowly but surely – and this is arguably by design – Chair Powell and the Fed are demonstrating their openness to embarking on a relatively prolonged interest rate cutting cycle. The key takeaway from this speech: Chair Powell asserted the Fed will act to ensure the US economic expansion continues. Given the weakening fundamental outlook for the US and global economy, markets have interpreted that as meaning another rate cut is coming this month, with market pricing giving it a 95% chance.

EBC expected to join Fed in easing rates this week

Beyond the Fed, and trade-war hopes aside, markets are still betting-big on major monetary policy stimulus from central bankers right across the globe. Ultimately, as headwinds from a slowing business cycle and trade-war grow stronger, it’s this hope of monetary policy stimulus that’s keeping global markets afloat. The ECB is will be the centre of attention in the week ahead. It meets on Thursday night, and will likely join the Fed in beginning a prolonged cycle of monetary policy easing. It’s considered an effective certainty that the ECB will cut interest rates by 10 basis points, to take Europe’s overnight cash rate to -0.50%.

PBOC doing its bit to tackle China’s slowdown

China’s central bank also stepped up to the plate to assuage the markets’ concern about the state of its economy. Dispensing with concerns regarding long-term financial stability, the PBOC announced that it will be lowering its Reserve-Ratio-Requirement for many of the country’s banks – effectively releasing extra money into the economy to support credit creation and economic growth. The news gave a leg-up to risk appetite, particularly across Chinese and broaden Asian markets, on Friday. It amounts to another sugar-hit for China’s notoriously speculative stock-market, with investors likely to capture some of that fresh liquidity, and fuel Chinese indices recent rally towards fresh year-to-date highs.

Geopolitical risks the biggest risks

Looking to the week ahead, and several geopolitical concerns jump-out as being perhaps the likeliest of cause of market volatility, now. One might even go as far as saying that given the several tiers of political-problems affecting the global economy presently, geopolitics is the number one risk for financial markets right now. The US-China trade war is undoubtedly the most significant. But throw in the protests in Hong Kong, ongoing Brexit-drama, and tensions in the Middle-East ahead of a major OPEC summit this week, the longevity of the current market recovery will likely hinge on all of these issues remaining relatively settled and stable.

Trade-war, Brexit, Hong Kong and OPEC

Things will only completely keel-over if US-China relations fall-apart again. However, the other major geopolitical risks will cause ripples in their own way. The Pound is still edging higher as the odds of a fresh general election and delay of Brexit increases. The Hang Seng is likely to retrace a bit after another weekend of protests in Hong Kong demonstrated that political chaos in the city won’t end with the withdrawal of the Hong Kong government’s controversial extradition bill. And the strength of oil’s downtrend will be tested, as OPEC is expected to announce production cuts this week to curb the recent drop in crude prices.