Prepared by Jeff Halley, Senior Market Analyst
Equities lose their bonding
The cracks in global equity markets threatened to grow wider still as relentless haven-buying of sovereign bonds overnight pushed key yields even lower and sent recession fears through stocks. Global stock markets were lower with the bellwether S&P 500 breaking 2800 and its 200-day moving average at 2773 in imminent danger. A weekly close below this level would be a strong technical signal of darker days ahead. The moving average itself is not a line in the sand, rather it tends to act as a pivot point, limiting corrective gains and sell-offs depending on which side of the line the index is lurking.
The bond market itself, of course, has been telling us all year that a global slowdown was on the way as yields continue to fall across the sovereign developed market bonds. This was reinforced in Q1 by a stampede of central banks moving to a neutral or outright easing bias led by the Federal Reserve. The US-China trade frictions had the potential to deepen the gloom substantially but were only priced as a preliminary skirmish by financial markets until very recently. With the skirmish on the cusp of escalating into a more extensive drawn-out attritional campaign, the fall in bond yields has accelerated, forcing global growth bastions of optimism such as stocks and oil to rethink their strategies.
Asia is unlikely to feel much relief today either with both the Nikkei 225 and the ASX 200 down over 0.50% in early trading. Australian Building Permits were released at 0930 Singapore time (SGT) with the street looking for a rebound of last month’s disastrous Building Permits data to between 0-3%. With Australian Commonwealth Bonds yielding record lows already, a poor reading could heap more pressure on the currency and increase RBA easing calls to screams at their meeting next month.
The US GDP and Initial Claims this evening will give us an insight into whether the US economies big block V-8 engine is still running smoothly. The street has priced in GDP growth at 3.10% annualised and 215,000 new jobless claims. With sentiment quite fragile at the moment, a lower GDP or higher jobless claims could spark another rush to the exit door for equities and oil. A better print is likely to consolidate rather than turn the tide of the recent sell-off.
The US dollar continues its march higher against most of its trading partners, buoyed by investor flows into the bond market. This sentiment has even overwhelmed buying of Japanese yen (JPY) with USD/JPY approaching resistance at 109.70. Regional currencies will be vulnerable to the same fate today, as emerging markets bear the brunt of the flight to safety.
With both Sydney and Tokyo markets already well in the red this morning, the scene is set for another potentially tough day for Asian equities. The S&P 500 fell 0.70%, the Nasdaq fell 0.80%, and the Dow Jones fell 0.90% overnight following a troubled European and Asian session. It is hard to see anything other than a positive US-China trade headline turning regional stock markets from their southerly course today.
Brent Crude fell 1% to USD69.40 a barrel and WTI dropped 0.40% to USD57.00 a barrel overnight as global economic sentiment soured. Having been one of the primary beneficiaries of the global optimism surrounding a US-China trade agreement, oil is, of course, one of the most vulnerable markets to any potential agreement running aground and spilling its contents. Geopolitics, unfortunately, does not come with double hulls.
Brent crude has traced out a series of lower highs throughout May with each rally fading sooner than the previous one and resistance around USD72.00 a barrel holding just recently. WTI broke its 200-day moving average at USD60.00 a barrel last week, and subsequent rallies have all faded at the USD59.00 region, meaning the technical picture for both oily cousins remains dim.
Gold rallied above USD1,285.00 an ounce initially overnight as the equity sell-off gathered pace. The rally faded as soon as it began though and gold fell to finish almost unchanged at USD1,280.00 an ounce. It appears clear that sustained haven flows from investors in 2019 are heading towards sovereign bond markets and not the yellow metal.
Although it holds its own in the face of a stronger dollar overnight, gold’s inability to rally or find sustained buying interest as the economic and geopolitical pictures darken is troubling. For now, gold remains marooned in a USD1,270.00-1,290.00 range with long-term support at USD1,265.00 an ounce.
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