All eyes re­main on Wall Street

Sunday Herald Sun - - Finance - TERRY McCRANN

WELL, Asia wanted to be­lieve, to re­ally, re­ally be­lieve — that the worst was over for global share mar­kets.

Wall St came back a bit last week and on Fri­day the three key mar­kets to our north — Hong Kong, Shang­hai and Tokyo — went gang­busters.

Hong Kong roared over 4 per cent to re­coup all its losses for the month, while Shang­hai went up a more re­strained 3 per cent and Tokyo a lit­tle less than that.

Our mar­ket, in con­trast, was all over the place on Fri­day, al­beit fi­nally fin­ish­ing in the black, if just with a 0.1 per cent lift. To stress, that wasn’t a full 1 per cent, just a tenth of that.

We were up 3 per cent for the week but we did not re­coup all the Oc­to­ber losses. It wasn’t just the “un­for­tu­nate” con­se­quence of run­ning into the big bank prof­its.

The un­der­ly­ing driver, Wall St, had a good but not a spec­tac­u­lar week.

De­spite go­ing down at the close overnight Fri­day, the Dow was up about the same 3 per cent as us from the low point of the week be­fore.

Three crit­i­cal points need to be made about what’s been hap­pen­ing in New York.

First, the mar­ket re­mains at very, very high lev­els — at the worst of the re­cent drop, the Dow was just 9 per cent off its all-time peak at the start of Oc­to­ber.

But sec­ondly, that masks con­tin­u­ing al­most-daily volatil­ity.

One day last week the Dow traded through a 1000-point range — it could have fin­ished that par­tic­u­lar day with a big rise or a big fall.

Third, the big tech stocks — Ap­ple, Ama­zon, Google and the like — con­tinue to drive most of this.

The mid-month plunge was largely them go­ing down, and they also drove the re­cov­ery.

Ap­ple went side­ways, but as a tril­lion-dol­lar stock it was a very solid side­ways.

They all re­main at very high val­u­a­tions which es­sen­tially dis­count all of the three ma­jor neg­a­tives which hang over the world econ­omy and global fi­nan­cial mar­kets.

These are the prospect — the cer­tainty, espe­cially af­ter an­other stel­lar jobs re­port overnight Fri­day — of higher US in­ter­est rates; the risk of an es­ca­lat­ing trade war be­tween the US and China; and a con­se­quen­tial ma­jor slow­ing in the world’s two big­gest and most im­por­tant economies.

Just for com­par­i­son, the US job­less rate is now down to an un­be­liev­able 3.7 per cent — black, Latino and other mi­nor­ity job­less has never been lower; and they are all start­ing to see solid wage rises.

In com­par­i­son, our job­less rate is down to 5 per cent — we are ac­tu­ally do­ing very well, but we haven’t seen wages stir yet.

That’s why while US rates are go­ing up — with the next move in De­cem­ber ab­sent some global shock — ours aren’t go­ing any­where any­time soon and ab­so­lutely not on Tues­day.

I would sug­gest in­vestors are get­ting some things right, if for the wrong rea­sons; and other things spec­tac­u­larly — over­con­fi­dently — wrong, with every now and then re­al­ity break­ing through. Hence the volatil­ity. Asia was right to be op­ti­mistic on Fri­day … China and the US are not go­ing to go to war — over trade, that is.

Pres­i­dent Trump is a ne­go­tia­tor — like, one should add, we have never, very un­com­fort­ably, seen be­fore.

He also, it is very im­por­tant to ap­pre­ci­ate, sees suc­cess in fi­nan­cial terms.

He fol­lows the ups and downs of the stock mar­ket like a hawk; and cer­tainly like no pres­i­dent be­fore him.

That’s why he’s megaan­noyed by Fed head Jerome Pow­ell put­ting up in­ter­est rates, but Pow­ell is go­ing to keep do­ing it and Trump is go­ing to con­tinue to get megaan­noyed.

That’s also why Trump is mega-pleased to see the Shang­hai mar­ket go­ing down — it’s his sign of suc­cess, while Wall St go­ing down would be a sign of fail­ure.

So, we are go­ing to get con­tin­u­ing volatil­ity driven by trade rhetoric and rate moves.

Pres­i­dent’s Trump’s move to reim­pose sanc­tions on Iran shows trade isn’t al­ways only about money for him.

All this adds up to a very con­fused en­vi­ron­ment.

In­vestors are not fac­tor­ing in the neg­a­tive im­pact of con­tin­u­ally ris­ing rates in the US in 2019, but at the same time, they are over­re­act­ing to the trade rhetoric.

This plays out in ex­ag­ger­ated gaps down when the trade is­sue boils over; while Wall St then springs back too firmly when they re­cede.

At least they are get­ting the volatil­ity “right”, but not the un­der­ly­ing trend, which to me will prove neg­a­tive over 2019.

So far as our lo­cal mar­ket is con­cerned, you need to fac­tor all that as the base and then add on our own spe­cial drivers — what’s hap­pen­ing in our econ­omy and so, in­ter­est rates; and the mix of lo­cal stocks.

We will con­tinue to be — re­luc­tantly — dragged up by Wall St and whacked when it goes down.

Pic­ture: AFP

A stocks dis­play board in Hong Kong shows an in­crease in the Hang Seng In­dex.

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