For one, yesterday’s print was underwhelming. Anticipated to print at 50.5, it came in at 50.1, stoking concerns that manufacturing in China could be slipping back towards a “contractionary” condition – that is, a print below 50, and forecasts a potential slip in activity in the broader Chinese economy.
3. What’s true for developed markets is true for China: Revealing investors priorities, however: the weaker data prompted a run higher in Chinese stocks, as markets bet on the need for more stimulus from China’s policymakers. Just like it has been, and continues to be the situation in developed markets, bad news is good news for risk assets.
Poor economic data and the subsequent belief it necessitates fiscal and monetary stimulus drives flow into the stock market; while good economic data and the subsequent belief it implies a removal of fiscal and monetary stimulus drives flows away from the stock market.
4. ASX pulls back from 11-year highs: The ASX200 caught little of China’s rally yesterday, giving up 0.5 per cent during the session. It was an overall lack lustre day.
Last week’s gainers, those in interest rate sensitive sectors like that of real estate and utilities, declined, as bond yields recovered some of their losses. And energy and materials stocks seemed to suffer from a fall commodity prices. Although numerous causes for the broadness of yesterday’s selling has been concocted, much of it seems a function of a small market pull back, after the ASX200 clocked its 11-year highs last week.
5. ASX primed for bank earnings: SPI Futures are indicating today that the ASX200 will open 15 points higher this morning. A possible inhibitor of upside in the market this week is that we are on the cusp of our big banks’ confession season.
The micro details of each bank aside, the macro outlook for the banks have improved recently, in response to a healthy steepening in bond yield curves. It’s well known the ASX struggles to prosper without the help of bank shares, so for market-bulls, some positive surprises from the banks this earnings could be the catalyst for a new push higher in the ASX200.
6. The Fed: markets’ main event: All eyes now turn to the US Federal Reserve. They’ll meet tonight (AEST) and will all but certainly keep interest rates on hold. Market participants instead will be keeping tuned to what the Fed has to say about the outlook for the US economy.
Despite reasonably solid economic data lately, markets are still pricing in a full cut from the Fed within the next 12 months. It’s this assumed dovish bent by Fed that’s in large part sustained risk-assets so far this year — and underwritten Wall Street’s record run in the past four months.
7. Have markets mispriced US rates? The risk tonight is that the Fed is more optimistic than expected: a dynamic that could force the adjustment of rate expectations and take the steam out of global equities. A pressing need to move to anything resembling a rate hiking bias by the Fed is absent, of course; especially given last year’s market tumult in response to a “hawkish” Fed.
But the core question is whether the presumption of such a dovish Fed is accurate. This fact is less certain and could be contradicted by the central bank’s communications with the market tonight, meaning a potential reshuffling in markets consequent to tonight’s meeting.
8. Market watch:
ASX futures up 20 points or 0.3% to 6324 at 7.15am AEST
- AUD flat at 70.48 US cents
- On Wall St: Dow +0.2%, S&P 500 +0.1%, Nasdaq -0.8%
- In New York, BHP -0.7%, Rio -0.7%, Atlassian +0.1%
- In Europe: Stoxx 50 +0.4%, FTSE -0.3%, CAC +0.1%, DAX +0.1%
- Spot gold +0.3% to $US1283.61 an ounce at 1.22pm New York time
- Brent crude +1.1% to $US72.85 a barrel
- US oil +0.6% to $US63.87 a barrel
- Iron ore +0.1% to $US94.17 a tonne
- Dalian iron ore +2.1% to 639 yuan
- LME aluminium -1.6% to $US1798 a tonne
- LME copper +0.3% to $US6415 a tonne
- 2-year yield: US 2.27%, Australia 1.31%
- 5-year yield: US 2.28%, Australia 1.37%
- 10-year yield: US 2.50%, Australia 1.78%, Germany +0.01%
- Gap between US, AUD 10-year yields: 72 basis points
This column was produced in commercial partnership
between The Sydney Morning Herald, The Age and IG