Market sentiment - APAC brief 22 Oct
Market sentiment: Markets put in a mixed day on Friday. The results for global equities were generally poor, but absent were any violent swings in market activity. Individual regions traded -off apparently their own idiosyncratic drivers, characteristic of the diverse web of risks plaguing investors. Chinese indices were the stand-out, climbing more than 2.5 per cent, collectively, while European shares were generally lower, and US stocks were mixed. The mood is still edgy and dour for equities overall, with the weight of an extending list of risks stifling appetitive for riskier assets. There is a growing sense now that the many and considerable challenges facing market participants are here to stay; the matter hence becomes what level of willingness do market participants possess to stomach these and push equity markets higher.
Risks-elevated: Uncertainty and instability isn't something novel for traders -- it's reigned for the last decade, as is well known. Yet it's proven now that there doesn't necessarily exist the confidence that, with the world's most powerful central banks turning off the liquidity taps, markets have the strength to sustain themselves. To be perfectly fair, 12 months ago, an all-out trade-war, the seeds for huge US twin deficits, a new Italian fiscal crisis, a Chinese economic slowdown, and major regional instability in the Middle East wasn't seriously expected. Without such interferences, perhaps the global economy would have been on stronger footing. It's pointless to speculate, however one can safely assume at this stage of the economic cycle, fundamentals should be presenting as much firmer.
Economic fundamentals: The way in which this dynamic of higher risk and lower confidence plays out in Australian markets will be curious, as the final stages of the calendar year unfold. The US economy is booming and that will anchor the global growth story until the Fed's interest rate hikes begin to lean on the US economy. For us down under though, it's of lesser relevance than what transpired in the Chinese economy. The massive data dump delivered on Friday out of China was on balance underwhelming: headline growth was lower, while the other tier-2 data releases didn't salvage much. The Australian economy is ticking along relatively nicely it must be said, but our economic fortunes will stay wedded to China's almost undoubtedly, with the effectiveness of Chinese policymakers attempts to stimulate their economy the key variable.
China: As far as markets go, equity indices seemed to benefit from the latest salvo by some of China's top economic officials about tackling any economic slowdown. In effect, policymakers came-out on Friday and implored market participants that they would ensure that a floor was placed under the recent sell-off across Chinese shares, in the interest of capital safety and financial stability. According to the slew of top-regulators who delivered the message, the massive tumble (30 per cent year-to-date) in Chinese stocks isn't reflective of the nation’s fundamentals, so support, it is argued, can justifiably be provided to align financial markets to the economy.
Europe: Although this story did underline a late rally in Chinese shares on Friday, the benefits diminished, if not disappeared, in the grand scheme of things, by the time the European session got underway. Fizzled Brexit negotiations were parsed, but weren't a significant sticking point for European traders, who were apparently more relieved about a modest easing of tensions between European bureaucrats and the Italian government about that countries fiscal problems – even despite a rating cut to Italian debt. The EUR and Pound ticked slightly higher and JPY dipped as anxiety around European political stability and China's growth moderated slightly, while US Treasuries declined throughout the day leading into the North American open, losing its haven bid, edging the yield on the 10 Year note to 3.19 per cent.
Wall Street: US stocks delivered little in the way of upside, slowed by activity in tech stocks again. Earnings season hasn't delivered the lift so far to US equities as hoped, stifled instead by the effects higher discount rates are having on stretched valuations in growth/momentum stocks. The Dow Jones did close 0.26 per cent higher – led by strong trade in consumer staples stocks and other defensives, along with financials, which gained on higher bond yields – however the more comprehensive S&P500 was flat. Worries that earnings growth leading into 2019 will be dampened drove the mood in US markets, with the key litmus test for this hypothesis possibly coming this week, as traders prepare for earnings reports from the likes of Alphabet, Microsoft and Amazon.
ASX: SPI futures are indicating a 12-point drop for the ASX200 against this backdrop, ahead of a day which should be of interest given the possible impacts of a hung parliament in Canberra. In the recent past, when confronted with leadership challenges and the like, it’s proven a drag on the A-Dollar and the ASX200. The banks have borne the greatest brunt, probably due to the regulatory crack down and the perceived unfriendly stance towards property and share investors by the Labor opposition – though it must be said but this risk has already been priced in by investors. Friday’s trade saw the bank witness a continued pop higher from its oversold levels, keeping the ASX200 trading flat for the sustained. Slightly higher commodity prices may aid the Australian share market in the day ahead, however with little real impetus for rally today, perhaps a grind more-or-less sideways can be expected to start the week.
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