It appears there’s emerged a self-reinforcing belief that economic fundamentals aren’t as bad as once thought.
Are things not so bad after all? It appears there’s emerged a self-reinforcing belief that economic fundamentals aren’t as bad as once thought. There’s not a simple binary that can be reduce out of this – a clear “risk-off” or “risk-on” signal. It’s clear there remains a general sense that the global economy is entering a soft-patch. But in that, is the key: slower growth is taken as granted, however the extent of such a slowdown is ostensibly being revised. There isn’t quite (just for the moment) the same level of catastrophism filling the news wires in financial markets right now. It raises the question whether the fundamentals have changed at all, or whether its actually market participants’ perception of the fundamentals that’s changed.
Improved perceptions towards fundamentals: An answer to that one is very difficult to grasp just looking at the price-action. To rattle-off one of the stalest of undergraduate clichés: perception is reality. In the case of traders, the rosier perception of economic fundamentals has inspired the emergence of a virtuous cycle in financial market bullishness. Very often, a break from fundamentals, and a movement towards some imagined state of affairs, gives birth to a sufficient enough divergence between sentiment and hard-data that a relatively small catalyst can spark a jolting correction in market-pricing. That may well be the situation market participants are operating. A blithe optimism or not, some key markets are approaching now key inflection points.
The will to end the trade-war: The big stories that are making this dynamic possible can still be rooted in a dovish US Federal Reserve (and dovish central banks across the world, at that) and a compounding hope that global trade skirmishes are reaching a resolution. Sharing that hope, or maybe trying to fan it, US President Trump is demanding freer trade. Tweeting on the weekend, Trump claimed to have “asked China to immediately remove all Tariffs on our agricultural products… based on the fact that we are moving along nicely with Trade discussions”. Such a statement is to be expected and will be of negligible consequence in the short term. The demand is indicative of where markets see the trade dispute: political will shall drive a breakthrough.
The (President) Donald Trump Show: Speaking of the US President, and he captured the attention of markets again over the weekend. In a 2-hour monologue at the CPAC conference, he addressed many of the concerns, controversies and crises enveloping his Presidency. Speaking “off the cuff”, as he phrased it, the spectacle could be considered comical, evening entertaining, if it weren’t for the stark reality that the man is the world’s most powerful person. Of financial market import, President Trump fired-up his belligerence towards the US Fed and Jerome Powell: “we have a gentleman that likes raising interest rates in the Fed, we have a gentleman that loves quantitative tightening in the Fed, we have a gentlemen that likes a very strong dollar in the Fed”.
Higher Treasury yields; stronger US dollar: It will be interesting to see today how markets react to the President's tirade. Unfortunately for him, his crass words will prove of marginal significance in the bigger picture. The US Dollar is finding plenty of advocates, driven by a renewed belief in the strength of the US economy. Chances of a rate cut from the Fed this year have been unwound. Treasury yields climbed markedly on Friday, despite weaker than expected ISM Manufacturing figures, and a PCE inflation reading that revealed price growth continues to amble below target at 1.9 per cent. The higher yield environment and stronger greenback has wiped the shine off gold (and really, most commodities) falling below $1300 per ounce.
US markets show risk appetite: The risk is that markets will end up in the position that assets, like equities, will lose their appeal again amidst the higher yield environment. A pertinent and high-impact concern, but seemingly one some way from materialising. Though at a multi-month highs at 2.75 per cent, the 10-year US Treasury is some way from the 3.26 per cent yield that stifled global markets last year and precipitated the Q4 sell-off. Riskier growth stocks in US tech are seemingly attracting buyers, indicating an underlying bullish moment in the US equity market. Having closed at 2803 on Friday, the S&P500 eyes the 2815 resistance level now as the crucial test for US stock market strength.
ASX to follow the US lead: For the first time in several sessions, the S&P/ASX 200 appears poised to follow the US lead this morning. The last traded price on the SPI Futures contract is indicating an 18 point jump this morning, on top of Friday’s closing price of 6192. The market experienced robust trade on Friday, despite soft (but above forecast) Caixin PMI numbers, and CoreLogic data that showed another monthly fall in domestic property prices. In fact: the latter, and its implications for monetary policy, was apparently seen as supportive of Real Estate stocks, which rallied 2.22 per cent on 95 per cent breadth. As far as milestones go, the ASX200 will eye 6230 resistance, ahead of what is a jam-packed week for Australian markets.