The Japanese Yen is back into the 105 handle, while the USD is also stronger. Gold is rallying too, as the pool of negative yielding bonds continues to swell. And SPI Futures suggest that the ASX200 will feel the pain acutely, with the ASX200 expected to open 125 points lower this morning.
3. Yield curves flash recession signs: Bond markets, as they are wont to do, are speaking the most sense. Price action across the US Treasury yield curve is flashing red right now. The run towards liquid, quality and safe assets has pushed US bond yields down over 10 points across the curve overnight. More concerningly, however, is what’s happening in the shape of the curve.
The spread between 2 Year Treasury note and the 10 Year Treasury narrowed to 1 basis point during Wall Street trade. An inversion in this spread is the most popular – though admittedly not the best – indicator of an upcoming recession in the US.
4. Markets bet again on easier monetary policy: One saving grace is that an inversion between the 2 Year and 10 Year US Treasury notes normally portends an upcoming recession, not an immediate one. The time lag is normally around 12-to-18 months. Regardless, the phenomenon itself puts the writing on the wall for the market, and policy makers. And the former thinks the latter will be listening.
Bets of the imminence and aggressiveness of interest rate cuts from the world’s major central were raised last night. Markets, for one, think the US Fed is a 35 per cent chance to cut rates by 50 basis points next month.
5. Trends turning to the downside for stocks: The concern now for stock market bulls is that momentum for stocks is on the cusp of definitively shifting to the downside. Technically speaking, short-term momentum had already turned south in recent weeks. But despite the prevailing bearishness in the market, longer term indicators of momentum have remained supportive of the market, and modestly pointed to the upside.
With last night’s price action, especially on the S&P500, the market’s resilience is being thrown into question. The index closed below it’s 200-day exponential-moving-average, opening up the possibility of an accelerated move lower in the coming days and weeks.
6. Fear to rob markets of rationality for a while: Financial markets for the next 24 hours are likely to be very emotionally charged. That means the economic data and fundamental news flow will probably be subordinated by the fear dominating market sentiment currently. Regardless, some important economic data will be printed in Australia and abroad in the next 24 hours.
Australian jobs numbers are printed this morning, while US Retail Sales data is published tonight. The US consumption figures present as another potential irritant to an already sore-and-sensitive market. American consumption has been strong in recent times. If it too looks like its beginning to wane, then recession fears can only fester more.
7. Jobs numbers highlight local trade: Labour market figures locally, though arguably the biggest domestic news today, will probably cede to global-macro issues as a driver of market activity today. Central bankers are increasingly looking abroad to take their cues on future monetary policy direction, and the market is likely to judge that the RBA’s next move will depend more on global concerns, rather than the minutiae contained within local data.
Nevertheless, today’s jobs numbers will give an update on the “spare capacity” problem in the Australian economy. Following yesterday’s flat Wage Price Index numbers, the unemployment rate is forecast to have remained steady at 5.2 per cent last month.
8. Market watch
ASX futures down 136 points or 2.1 per cent to 6399 near 7.15am AEST
- AUD -0.8% to 67.48 US cents
- On Wall St: Dow -3.1% S&P 500 -2.9% Nasdaq -3%
- In New York: BHP -2.9% Rio -2.9% Atlassian -4.9%
- In Europe: Stoxx 50 -2% FTSE -1.4% CAC -2.1% DAX -2.2%
- Spot gold +1% to $US1516.43 an ounce at 1.56pm New York time
- Brent crude -4.2% to $US58.72 a barrel
- US oil -4.5% to $US54.56 a barrel
- Iron ore +1.6% to $US90.72 a tonne
- Dalian iron ore +0.3% to 638 yuan
- LME aluminium -0.6% to $US1775 a tonne
- LME copper -1.1% to $US5765 a tonne
- 2-year yield: US 1.58% Australia 0.72%
- 5-year yield: US 1.50% Australia 0.67%
- 10-year yield: US 1.58% Australia 0.94% Germany -0.65%
- 10-year US/Australia yield gap near 6.15am AEST: 64 basis points
This column was produced in commercial partnership between The Sydney Morning Herald, The Age and IG