Flowless rally - APAC brief 18 Mar
A flowless rally: It’s being dubbed the “flowless rally”. Equities are ticking higher, but without the fundamental buying-support one might assume. This is especially so when considering the milestone achieved on Wall Street on Friday. Finally, the 2815 resistance level has tumbled, and the bulls have cautiously, quietly rejoiced. There are yellow flags popping up here and there, however, and that is making participants wary. It goes back to this “flowless rally” business: the latest leg of global stocks big recovery isn’t being supported by investor flows. In fact, investor flows look to have diminished somewhat. The reasoning behind this move is somewhat speculative. The impact of share buybacks is one popular argument. Whatever the cause, confidence isn’t accompanying this rally.
Economic conditions deteriorating: Maybe market participants are still scorned from the market correction in 2018. A bitterness and cynicism stemming from that is understandable. Much of the frustration comes, it would seem, from a widespread recognition that this rally has come in the absence of solid fundamentals. On the contrary, if looking at the macro-outlook, there are more reasons to be bearish than bullish right now. Global growth is (almost) irrefutably slowing, and some of the geopolitical sore-points dictating sentiment, like Brexit and the US-China trade war, are showing little new signs of progress. A major factor keeping this rally alive in riskier assets, perhaps concerningly, is a little case of “fear of missing out”.
Markets betting on policy support: Policy makers are igniting this behaviour: market participants are hoping-big that they can turn the economic ship around. Such policy intervention if for good cause, and with good intentions, of course: economic growth the world over is wheezing, and those whose job it is to address this affliction are experimenting with ways to cure it. The concern now relates to the unintended consequences, of course. Just on Friday, two more stories relating to stimulatory economic policy galvanized markets. The first came from the board of the Bank of Japan, who as expected downgraded their economic outlook and hinted at sustained monetary stimulus. The second came from Chinese Premier Li Keqiang, who announced more fiscal measures to tackle China’s economic slowdown.
Premier Li stokes optimism: The latter of the two stories carried most weight. It betrays what financial markets’ biggest concern is now: the health of the Chinese (and therefore global) economy. The move into stocks and growth-tied markets on Friday was catalysed by Premier Li’s boldness, especially. In a bid to quell concern about a deterioration in China’s labour market, he stated the Communist Party leadership would look to lower the Reserve Ratio Requirement, cut taxes, and lower interest rates if necessary. Risk and growth assets across the region rallied on the news. The CSI300 added 1.26 per cent for the day and the Australian Dollar climbed back towards the 0.7100 handle – the latter despite little move in yield spreads.
The more accurate indicators: Although there were signs of optimism in speculative assets because of the prospect of further stimulatory fiscal and financial conditions, better barometers of the growth outlook were unmoved. Bond yields generally fell, as traders continued to price in a world of lower growth and falling interest rates. The US 10 Year Treasury Note closed at 2.58 per cent over the weekend; and bets were increased that the US Fed, ECB and our own RBA would have to cut rates at some stage before the end of 2019. Granted, this dynamic has supported equites, and risk assets like corporate credit. However, if economic growth is to slow like expected, the question is: how long is it before slower growth manifests in the earnings outlook?
Measures of fear stay subdued: Only the shiniest and clearest crystal ball can predict that one. Market participants may prove emboldened in the short term irrespective, as a hunt for yield, some technical drivers, and a touch of momentum spur the herd to push the market higher. Naturally, this comes with risk, although the areas one might expected to see hedging against this aren’t finding love either. Gold is up but remains closely wedded to the $US1300 pivot point. The US Dollar isn’t attracting safe haven flows in the short term, either. Perhaps most tellingly, the VIX has continued to creep lower, closing last week at 12.88; and poetically, finds itself at lows not registered since Jerome Powell’s notorious “a long way from neutral” speech.
ASX200 to leap out of the gates: It hasn’t been the most reliable indicator of the intraday fortunes of the ASX200 of late, but the last traded price on the SPI futures contract is indicating a 35-point jump at the open today. A part of this ought to occur by virtue of a small bounce back following Friday’s index rebalancing, which saw heightened activity in heavily weighted stocks at Friday’s close. Last week for the ASX200, when contrasted with the world’s other major equity indices, was underwhelming. It was one of the few to close lower for the week. Wall Street traders are mumbling about the potential for US indices to clock new all-time highs currently. For us, the ASX200 is now 2.76 per from its decade-long high.
Written by Kyle Rodda - IG Australia
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