The Australian sharemarket is set to surge higher to open the week with news of a looming US-China trade deal sending Wall Street to record highs on Friday. At 7.45am AEDT, futures are pointing to a gain of 39 points, or 0.6 per cent, at the open.
1. Santa rally: The foundations are set for a Santa Claus rally into the end of the year now. This week was loaded with event risk, and really, with the way things have fallen, the market’s bulls probably couldn’t have asked for a better outcome. Today, things were all about the UK General Election, and the US-China trade-war.
Both events have delivered very good news: exit polls and the early counting suggest the UK Conservative Party will secure a significant majority in Parliament; and it’s been reported that US President Donald Trump has signed off on a trade-deal between the US and China. The combination of these stories, as well as some market friendly outcomes out of yesterday’s ECB and Fed meetings, has elicited that just right feeling amongst traders. Two major geopolitical risks look to be progressing towards a resolution, with little risk that financial conditions will be anything less than accommodative going forward.
2. Wall Street surge: It’s undoubtedly so that the trade-war news is the most significant to the market. US stocks hit new all-time highs on Friday, and US Futures today are trading as though those records will be added to tonight, after the Trump administration flagged an imminent trade-deal with China.
The details of the proposed deal are probably even better than the market foresaw, too. December 15’s tariffs will not be hiked as scheduled – but that much was assumed. However, the surprise came from the detail that existing tariffs on China’s economy, which apply to about $US360b worth of goods, will be reduced by 50 per cent. This amounts to relatively considerable progress in trade-talks, and removes a major headwind to global economic activity going into 2020. The notion that the global economy is in for a little recovery next year is acquiring credence, and that’s driving upside in growth and risk sensitive assets today.
3. UK election: A pretty good picture is emerging of the results of the UK General Election now. Exit polls this morning are pointing to an 86 seat Conservative Party majority – a result that would deliver the Tories power in their own right. The markets have celebrated the outcome, with the door wide open now for UK Prime Minister Boris Johnson to pass his Brexit deal through Parliament come its January 31st deadline.
The Pound has absolutely blitzed it today off the back of the news, rallying by as much as 2 and a half per cent, to play with the 1.35 handle, and trade at its strongest since June 2018. That’s setting up the FTSE100 for a weak open once trading in Europe gets underway. The move is ought to be mirrored in UK Gilts, with yields poised to plunge, as traders discount a lower chance of a Bank of England rate cut next year.
4. Brexit questions: This is undoubtedly a big day for Brexit, but it’s not it’s last. Of course, there’s matter of getting the actual withdrawal agreement settled before the end of January. But more pertinently, this outcome today, nor the Brexit agreement itself, really addresses any of the issues related to the question of what’s next? The UK will enter a transition period now, that extends until December 2020. In this time, it will be up to the Johnson government to negotiate new foreign policy and trade relations with the EU, and even other nations, at that.
A new trade agreement will likely be the sticking point, and key issue, for market participants from here. The market is going to want to see, effectively, an as open as possible trading relationship, to ensure the best odds that growth in the economically stagnant region is unrestrained by any potential restrictions on physical or financial markets.
5. Markets brimming with optimism: Stocks indices are finding buyers across the board this morning, and bond yields are climbing, as traders price-in improvements to global growth outlook, courtesy of today’s events. The most interesting and impactful moves are occurring in FX markets. Stuck in a state of low volatility up until recently, trading has sprung to life in the forex world today, with some potentially large-scale changes occurring. The Pounds rally is the most notable. But the bullishness engendered by news of a trade-deal, as well as the tentative UK election result, has seen the Euro take flight, too.
The EUR/USD has broken through key resistance at the pair’s 200-day EMA, in a tentative sign of a long-term trend reversal. The stronger Pound and Euro has combined to push the US Dollar Index lower too, threatening the DXY’s multi-year uptrend, as traders diversify across the G4 currencies, and take a punt on more growth sensitive currencies.
6. Aussie dollar on the march: One of those currencies, of course, is the Australian Dollar. It’s kicked higher again, courtesy of the greater optimism towards the global economy engendered by the US-China trade-deal, along with the knock-on effects a stronger Pound and Euro has had on the US Dollar. The AUD/USD is trading above the 69 cent mark this afternoon, and is looking as though, from a technical perspective, it’s angling for a further break to the upside.
Like the EUR/USD, the AUD/USD is challenging its 200-day EMA – a technical level that has marked firm resistance throughout its nearly two-year downtrend. The fundamental case for a stronger AUD/USD still seems difficult to make, given the softness within the domestic economy, and the high likelihood of RBA cuts next year. Regardless, the Aussie is trading very much as a global growth proxy right now, with price action suggesting it possesses the capacity run higher from here.
7. The flow-on effect: The strengthening Australian Dollar this week has proven a headwind to the ASX200 this week. Adjusted to US Dollars, the index is trading 2 per cent higher this week. It’s been a strong day’s trade for the local market today. The financial sector has carried the load, adding 30 basis points to the index, buoyed by a considerable jump in Australian sovereign bond yields, and a steepening of the yield curve. Cyclical sectors have also performed strongly, on the stronger sentiment towards the global growth outlook. The materials sector has added 12 basis points, and the energy sector has added a couple of points to the index, too. Of course, given the moves in rates markets, the rally has necessarily been spread broadly across the market. Real Estate stocks have tumbled 1.5 per cent, and utilities stocks have shed 0.5 per cent, as those stocks relative yield appeal diminishes.
8. Market watch:
ASX futures up 39 points or 0.6 per cent to 6782
The S&P/ASX 200 rose 30.9 points or 0.5 per cent to 6739.7 on Friday
- AUD -0.5% to 68.74 US cents (YTD return -2.5%)
- Sterling +1.3% to $US1.3331
- On Wall St: Dow flat S&P 500 flat Nasdaq +0.2%
- In New York: BHP +0.8% Rio +0.4% Atlassian +3.1%
- In Europe: Stoxx 50 +0.7% FTSE +1.1% CAC +0.6% DAX +0.5%
- Nikkei 225 futures -0.4% Hang Seng -0.7%
- Spot gold +0.4% to $US1476.33/oz in New York
- Brent crude +1.1% to $US64.92 a barrel
- US oil +1.5% to $US60.07 a barrel
- Iron ore +0.6% to $US94.63 a tonne
- Dalian iron ore +1.1% to 658 yuan
- LME aluminium -0.4% to $US1768 a tonne
- LME copper -0.4% to $US6130 a tonne
- 2-year yield: US 1.60% Australia 0.81%
- 5-year yield: US 1.65% Australia 0.85%
- 10-year yield: US 1.82% Australia 1.25% Germany -0.29%
- 10-year US/Australia yield gap: 57 basis points
This column was produced in commercial partnership between The Sydney Morning Herald, The Age and IG
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Information is of a general nature only.
Source: Thanks smh.com