Market News & Analysis
Red flag still flying for global stock bulls
Ken Odeluga December 3, 2018 10:15 PM
Some restraint is now showing in global stock market relief though even a qualified trade war truce is still a red flag for bulls.
major European stock indices opened with a ‘gap higher’. Such gaps are almost always filled, when euphoria passes. With some markets bounding almost two standard deviations, in other words to edge of their recent range, reversion seems probable even for ‘technical’ reasons alone. There are plenty of fundamental reasons to question the underpinnings of this rally too, or at least how long these may hold. Sure enough, some indices have their halved earlier advances. But last week’s hint that Fed tightening could soon follow an easier cadence, capping dollar strength, continues to lift weight from currencies, bonds and markets where borrowing costs were getting troublesome. At the same time, the global economy’s place in the cycle—after the crest but way above the trough—should also mean the instinct to reprice risk outlasts the session. Given the glaring underperformance of Chinese shares this year and Europe’s often eye-catching sensitivity to that region they could both have an edge if typical end-of-year bargain hunting takes hold
Figure 1. – normalised stock index chart: MSCI Asia-Pacific excl. Japan; STOXX Europe 600; S&P 500; Shanghai Shenzhen 300: year to date
Source: Refinitiv/City Index
European mining stocks extend gains
It’s one reason why the sea of green remains a transatlantic one and for the ease with which the 10-year Treasury yield was sent scurrying after an early attempt on 3.05%. It was down a little short of a basis point from that top just now, having earlier returned almost all of its run higher in Asian trading. Also helping: 1. a more favourable set of circumstantial indications on the chances of an effective output cut when OPEC meets, starting on Thursday. 2. The spate of PMI prints due from all corners this week have mostly behaved so far. Friday buyers of shares in European banks, car makers and mining and metal industries look vindicated most. These sub-indices have surged to the front looking to correct deep underperformance. So far, they barely touch 15%-20% 2018 declines, including Friday’s anticipatory bounce. On Monday, STOXX’s Basic Resource gauge is among the few to extend gains in the second half of the session. In this context, a 2.8% jump by Europe’s technology sector reflects a more measured assessment of the reprieve that may have been won in Buenos Aires.
Signs of extended truce will be key
The least equivocal plus of the deal is Washington’s new willingness to offer Beijing time. But it is just as obvious that this inclination may not last. In fact, in some ways, it’s too late. The mid-term incentive has passed. The Trump administration can certainly avoid worrying about Republican farming states till at least March. And that stretch of some 90 days is nowhere near enough to talk over all contentious issues. The tight schedule suggests an extension is all but inevitable. But it’s not guaranteed. The chances of China and the U.S. agreeing to an even longer ‘ceasefire’ for negotiations thereby becomes one the most important points for investors to watch at the start of 2019.
What could possibly go wrong
Before then, hawks, led by the most competent one, Trade Representative Robert Lighthizer, can re-state their case to a President who often changes his mind, sometimes apparently reacting to perceived slights. If hawks prevail again, it’s worth noting that the 10% tariffs on $200bn in Chinese goods that automatically ratchet up to 25% won’t be all. Saturday’s agreement was loose enough for Washington to also impose tariffs on $267bn in further trade threatened in the autumn. For China, whose state news barely mentions the 90-day timeline, the accord ends just before the annual National People’s Congress. Since discussions will almost inevitably not be concluded by then, it might be bad timing for further compromise.
Fed’s Powell back in view
In the meantime, the return of Federal Reserve chair Jerome Powell to the TV cameras this week will be the next event that moves investors to the edge of their seats. His testimony on Wednesday to the congressional Joint Economic Committee will be his first opportunity to fine tune – or just outright tune – comments last week that triggered a big reassessment of rate expectations. Since the market seized on the notion of how close rates are to ‘neutral’ compared to October, the committee could request a working definition of what ‘neutral’ means right now. Depending on that, further reassessment of rate expectations, and hence risk, may be required. Powell’s counterpart, Mark Carney faces a similar hearing on behalf of the BoE earlier that day. Short-lived headline risk for the punch-drunk pound is likelier than in Powell’s hearing. The governor has been less of a stranger to the TV screens than the Fed chair and has hashed out most iterations of the Bank’s stance quite thoroughly already.
This report is intended for general circulation only. It should not be construed as a recommendation, or an offer (or solicitation of an offer) to buy or sell any financial products. The information provided does not take into account your specific investment objectives, financial situation or particular needs. Before you act on any recommendation that may be contained in this report, independent advice ought to be sought from a financial adviser regarding the suitability of the investment product, taking into account your specific investment objectives, financial situation or particular needs.
GAIN Capital Singapore Pte. Ltd., may distribute reports produced by its respective foreign entities or affiliates within the GAIN Capital group of companies or third parties pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed to a person in Singapore who is not an accredited investor, expert investor or an institutional investor (as defined in the Securities Futures Act), GAIN Capital Singapore Pte. Ltd. accepts legal responsibility to such persons for the contents of the report only to the extent required by law. Singapore recipients should contact GAIN Capital Singapore Pte. Ltd. at 6826 9988 for matters arising from, or in connection with the report.
In the case of all other recipients of this report, to the extent permitted by applicable laws and regulations neither GAIN Capital Singapore Pte. Ltd. nor its associated companies will be responsible or liable for any loss or damage incurred arising out of, or in connection with, any use of the information contained in this report and all such liability is hereby expressly disclaimed. No representation or warranty is made, express or implied, that the content of this report is complete or accurate.
GAIN Capital Singapore Pte. Ltd. is not under any obligation to update this report.
Trading CFDs and FX on margin carries a high level of risk that may not be suitable for some investors. Consider your investment objectives, level of experience, financial resources, risk appetite and other relevant circumstances carefully. The possibility exists that you could lose some or all of your investments, including your initial deposits. If in doubt, please seek independent expert advice. Visit cityindex.com.sg for the complete Risk Disclosure Statement.
Cryptocurrencies are not legal tender currency and trading of derivatives on Cryptocurrencies are currently not covered under any regulatory regime in Singapore. Consequently, investors should be aware they do not have protection under the Securities and Futures Act (Cap. 289). Please ensure that you are fully aware of the risks.