After the stunning US equities received following the US Fed's more dovish-than-dovish policy meeting yesterday, seemingly traders have leapt back into stocks.
US equities bounce back
After the stunning US equities received following the US Fed's more dovish-than-dovish policy meeting yesterday, seemingly traders have leapt back into stocks, somewhat inspired by the notion cheap-money is here to stay. One ought not to be fooled, however. The central dynamic still remains. And that's that fears are real and visible in the market currently. The fact economic growth is slowing down in the world's biggest economy -- and perhaps a little quicker than previously thought -- is a major concern for markets. But, even if it's begrudgingly, traders all dance to the Fed's tune; so, when they say keep dancing, that's just what markets have to do.
The core dilemma remains
It doesn't change the core dilemma: financial conditions, following its deterioration last year, are irrefutably supportive of equities again. But economic growth is on a knife edge, and even with all the monetary support in the world, if it doesn't translate to earnings growth, then it ultimately means little to market participants. Markets aren't at that cross roads, though the knowledge it could be coming up over the horizon has the commentariat chattering. The goldilocks-zone (which has become so often referenced in markets it's become hackneyed) is narrower than what it has been in the past. Fingers are crossed from all concerned that that monetary stimulus across the globe can somewhat reverse this phenomenon.
US Treasuries speak of growth worries
The ever-reliable bond market is telling us that it's going to take some work to achieve this result. US Treasury yields didn’t tumble last night like they had in the day prior's trade. Actually, they've probably lifted a little bit overnight. The fundamentals, though, are still the same. Interest rate traders are betting that a Fed cut will happen will in the next 12 months, and that will probably come courtesy of a global economic slowdown in the medium term. The US 10-year Treasury yield dipped below the Fed's upper bound of its interest rate target at 2.5%. And still, maintaining its moves post-Fed, from the 2 to the 7 year, US Treasuries are trading at or below the effective OCR.
Eyes on Europe tonight
In tonight’s trade, the proposition that the global economy is slowing rapidly will be duly tested. This time, it the European region’s turn to prove its mettle. A swathe of PMI data is released and will give a forward-looking hint as to what’s happening in the Eurozone. If recent history is a guide, the answer may be “not enough”. Europe, of course, is the meat in the global economic sandwich at present, stifled by domestic politico-economic instability, Brexit, and the trade-war. Hopes of a normalization of ECB policy in the near-term are all but dashed, consequently. 10 Year German Bund yields have dropped to a multi-year low at 0.03%, on its pilgrimage back to negative yield once more.
Keep Calm and Carry On
Across the English Channel however, the story isn’t quite so bleak – that is, if you ignore the incompetency of the British political class and focus solely on the productive members of UK society. More UK data was released overnight, this time Retail Sales numbers, and the figures were another healthy beat. The timing of the data was fitting, following from Tuesday and Wednesday’s inflation and labour market beats, and prefacing last night’s Bank of England meeting. The BOE find themselves in a frustrating position now: their efforts are working -- and they have both the will and ability to lift rates. But it all means practically nothing. Until Brexit finally disappears into the dustbin of history, then the BOE can’t afford to tighten monetary policy.
Can the ASX wake-up?
Afforded to it by the rally on Wall Street, the ASX 200, according to SPI Futures, ought to open almost 40 points higher today. If the last fortnight is any guide, this indicator should be taken with a pinch of salt: its become a trend that SPI Futures indicate a robust start for the ASX, only for the cash-market to disappoint the bulls. The situation is contributing to a tired state of affairs for Australian equities, which seem hamstrung by the weakening outlook, and other risks, for the domestic economy. A lift in materials prices is keeping the miners well supported, while the defensive rotation into yield stocks is still-on. However, financials are foundering, suffocating the overall ASX 200, subsequently.
Growth to slow, just perhaps not so fast
Aus-econ buffs got their dose of data yesterday, too. Employment figures were released, and were well received: the unemployment rate fell, despite a miss on the headline jobs figure, and probably courtesy of a drop in the participation rate. Nevertheless, the Aussie-Dollar rallied, as traders repriced implied rate cuts from the RBA in 2019 to 30 basis points. Although a fairly cheery print, market participants haven’t exactly changed their fundamental stance on the domestic economic outlook. To keep with the theme: though the short end of the yield curve edged higher, the back end dropped, reflecting a pricing-in of weaker growth and inflation expectations – an impulse also reflected in consumer discretionary stocks following yesterday’s employment print.