The world economy and financial markets are displaying signs of duress as traders enter the mid-part of the week. Trade war fears hang over markets like a darkening cloud, and emerging markets are wobbling and appear on the verge of a greater crisis.
1. Aussie dollar hit: Of the two prevailing concerns, the problems are emerging market economies is slowly taking greatest attention. The South African economy looks to be slipping into recession and Argentinian policy makers are scrambling regain control of financial markets.
The woes have driven another haven play into the US Dollar, pushing the price of gold back below $US1200, the AUD/USD to just above ~0.7175; while the potential for softer global growth has weighed on commodities and hit materials stocks.
2. Contagion risk: As it applies to attitude of traders, the moves in developed markets are only as painful as the impact they may have on developed markets. If this week is to be judged, without any clear news story indicating this to be so yet, price action across global markets points to a growing concern that the risk of contagion is high. Like with the Turkey crisis, it will be the warning cries of a developed institution that could set off a cascade of selling.
Where this will come from, it remains terribly difficult to tell within the opaque world of financial markets. However, signs of stress within Europe, which is no great state financially itself, could prove the canary in the coal mine.
3. Wall Street: US markets jumped back online overnight, after being closed for 3 days for the Labor Day holiday. Global markets had trade sloppily in the opening stanza of trade this week, due to the lower liquidity brought about by US traders absence. The question pondered by market participants within this dynamic was how US equities may hold up within increasing global geopolitical and financial risks. Despite edging lower throughout the day, with the major indices posting modest losses across the board, the impact on US markets was relatively subdued.
Though it’s too early to tell, as the US economy and its share market continues to roar, a key question will be whether we are heading for a divergence in economic and financial activity between the US and the rest of the world. SPI futures are indicating a considerable drop at the open of 36 points, following a lacklustre day for the Australian share market.
4. ASX: Local equities appeared to fall in line with their regional counterparts yesterday, owing it seems to a reluctance by investors to buy into equities amid simmering trade wars and emerging market risks. The ASX200 shed 0.44 per cent throughout the local session, to close trade above an area of modest support at 6280.
In what can be considered a positive sign for the market, yesterday’s decline came on a very low value of trade, indicative of a market that is less bearish than it is cautious. The ASX has proven its willingness to rapidly swing higher, with the current trend still intact: it may be however that only once a resolution to some of the issues underlying the major market risks will the index recover its climb.
5. RBA: The outcome of yesterday’s RBA meeting had long been a foregone conclusion, with the RBA keeping interest rates on hold for the 25th successive meeting at 1.50%. Again, and has so long been the case, traders were especially attuned to the RBA’s accompanying statement, particularly in the light of a recent spate of weak Australian fundamental data releases.
The focus lay in whether the RBA would begin to show signs of doubt or even pessimism about the Australian economy, be that through an explicit statement or a subtle change of language. Much to the relief of traders, no such shift in tone was forthcoming, pushing the AUD/USD above the 0.7200 handle once more; and helping the ASX200 staunch some of the day’s losses.
6. Economy scepticism: Digging into the statement and how it purportedly reflects the Australian economy; the growing cynical chorus of RBA doubters were handed ample material to feed their scepticism. Despite recent concerns about the strength of Australian households, slowing global growth, and a looming lift in borrowing costs, the RBA stuck to their line: the growth outlook remains at about 3 per cent, while inflation will apparently pick up slowly and unemployment should reach 5 per cent by the end of next year.
The picture the RBA is painting is one any punter would like to buy; but for now, at least in the collective mind of interest rate traders, which continue unwind rate hike bets, it seems to0 glossy to be real.
7. GDP on tap: It is this mentality that shapes the perception of today’s quarterly Australian GDP figures. Forecasts for the data have become choppy in recent days, as economists re-adjust their models to include some of the poor numbers seen in Retail Sales, Private Capital Expenditure and the Current Account data seen of late. The broad consensus now is a quarter-on-quarter growth figure of about 0.8 per cent, taking the annualized rate of growth to 2.8 per cent.
Notably, if realised, the data will slip below the 3.1 per cent annualized figure registered in the March quarter and the RBA’s own rosy expectations. Although only a significant undershooting in the growth data risks destabilizing markets, a sub-3 per cent growth figure will provide more feed to the Australian economy’s naysayers.
8. Market watch:
SPI futures down 19 points or 0.3% to 6261 at 6.15am AEST
AUD -0.4% to 71.80 US cents (Overnight low 71.57)
On Wall St: Dow -0.1% S&P 500 -0.3% Nasdaq -0.2%
In New York, BHP -1.7% Rio -3% Atlassian +2.1%
In Europe: Stoxx 50 -1.1% FTSE -0.6% CAC -1.3% DAX -1.1%
Spot gold -0.7% to $US1192.62 an ounce at 2.25pm New York time
Brent crude +0.2% to $US78.34 a barrel
US oil +0.3% to $US70.01 a barrel
Iron ore +0.9% to $US66.62 a tonne
Dalian iron ore +0.4% to 487 yuan
LME aluminium -1.7% to $US2062 a tonne
LME copper -2.5% to $US5815 a tonne
2-year yield: US 2.65% Australia 1.98%
5-year yield: US 2.77% Australia 2.13%
10-year yield: US 2.90% Australia 2.52% Germany 0.35%
US-Australia 10-year yield gap: 38 basis points
This column was produced in commercial partnership
between Fairfax Media and IG