The falling apart of the Trump-Kim talks in Hanoi disturbed markets, mostly in North-East Asian markets, such as the KOSPI, before the conclusion was drawn that a grand-peace pact between the US and North Korea was an absurd fantasy to begin with. The true focus was on China’s PMI numbers during our Asian trade – and how, once more, very disappointing they were.
3. Chinese markets’ bullishness: China’s equities betray a market that sees hope in the Chinese economy. Even despite a slight pullback this week, the CSI300 is still up nearly 21 per cent year-to-date. The data market-participants are getting doesn’t yet support this behaviour, though.
Yesterday’s official PMI numbers revealed a manufacturing sector still in contraction by that measure, and a services sector that is softening progressively. It’s probably a combination of the PBOC’s extreme stimulus measures, designed to pump liquidity into the Chinese financial system and boost the supply of credit, plus favourable trade-war developments, that is supporting Chinese equity indices. Both are sentiment boosters, sure. But the market, in the long term, will need more than that to sustain this run higher.
4. Are commodities leading the way? To play a bit of devil’s advocate: some (arguably contrarian) punters are suggesting that current market consensus is all wrong. The growth outlook, while not as bright as the end of 2017 and start of 2018, is still reasonably solid. Just look at commodities: copper is leading the way, having broken its recent range to the upside, and now looks poised for a further run.
And the gold-silver ratio – a rough but handy barometer of risk-aversion against the growth outlook – is registering an 84 reading. By historical standards, this is high, and may indicate that after all this talk of bear markets, and a synchronized global growth slowdown, the global economy still has some juice left in it yet.
5. US growth: The other, slightly less ambiguous side, of the “tale of two cities” binary is the US growth story. It was on shaky ground in January and Early February, however last night’s US GDP reading went some way to re-ignite hopes the US economy remains on sound footing, for now. The headline figure exceeded expectations considerably, printing at 2.6 per cent versus a forecast 2.2 per cent, on a quarterly basis.
Though it hasn’t manifest in equity markets – all too often good macroeconomic news is seen as bad for risk assets because of its implications for interest rates – US Treasury yields lifted markedly, as interest rate traders rapidly unwound their bets on a Fed rate cut this year.
6. The US Dollar: Of course, the higher yield dynamic for US denominated assets has generally lifted the US Dollar. As it pertains to the Australian Dollar, the yield spread between 2-Year US Treasuries and 2-Year ACGBs has expanded to 83 basis points, guiding the AUD/USD below 0.7100 once again.
Also, a function of the US Dollar, gold prices have broken a short-term trend, suggesting its overdue pullback has arrived. In the medium to long term, a strong argument can be made that the trend lower in global yields and the voracious buying of gold by some of the world’s biggest central banks will underwrite gold strength. Here and now though, and gold looks poised for a brief and necessary wave lower.
7. ASX200 waiting for a push: Forever one of the many layers of meat in the global economic sandwich, the ASX200 will take the themes twisting markets, and translate them, according to SPI Futures, into a 7-point gain at today’s open. I
f Wall Street’s lead were to be followed, an indecisive and uninspiring day might be on the cards for the ASX. Following yesterday’s solid CAPEX numbers, domestic growth is less a concern; and market internals suggest that that although this rally is long in the tooth, there’s the technical capacity to run higher. But with reporting season ending now, a macro-catalyst may be required to spark the next run higher for the ASX200: earning’s growth will likely come-in flat YOY, dampening the market’s crucial fundamentals.
8. Market watch:
SPI futures up 12 points or 0.2% to 6161 at about 5.30am AEDT
AUD -0.6% to 70.97 US cents
On Wall St at 1.24pm: Dow -0.1% S&P 500 flat Nasdaq flat
In New York, BHP -2.4% Rio -0.6% Atlassian +1%
In Europe: Stoxx 50 +0.5% FTSE -0.5% CAC +0.3% DAX +0.3%
Spot gold -0.4% to $US1314.44 an ounce at 1.21pm New York time
Brent crude -0.6% to $US66.00 a barrel
US oil +0.4% to $US57.18 a barrel
Iron ore +2.1% to $US85.29 a tonne
Dalian iron ore +1.8% to 614 yuan
LME aluminium -0.6% to $US1911 a tonne
LME copper flat at $US6509 a tonne
2-year yield: US 2.52% Australia 1.69%
5-year yield: US 2.51% Australia 1.72%
10-year yield: US 2.71% Australia 2.10% Germany 0.18%
US-Australia 10-year yield gap as of 5.21am AEDT: 61 basis points
This column was produced in commercial partnership
between The Sydney Morning Herald, The Age and IG