Global markets appear to have reached an inflection point in the last week, with optimism a United States-China trade agreement could be imminent set to push the Australian sharemarket close to a record high this week.
ASX futures pointed to a 27 point, or 0.4 per cent advance on Monday, with markets pricing in astrong chance Beijing and Washington make an agreement on trade before the year is out.
Last week, gold suffered its biggest weekly decline in 2½ years, falling 3.7 per cent to $US1458.92 an ounce as investors decreased their exposure to the safe-haven commodity, hopeful a “phase one” deal will be signed.
Brent crude prices, which have been weighed by the prospect of an extended trade war dragging on demand,touched a six-week high of $US63.32 a barrel on Wednesdayafter China’s announcement both sides would roll back tariffs.
All three benchmark indices on Wall Street closed last week at record highs, withChina announcing earlier in the week it had agreed to roll back tariffs on each other’s goods.
WhileUS President Donald Trump denied such an agreement had been reached, he said talks between the two countries were going well, lifting stocks on Wall Street on Friday.
Officials in Washington are also reportedly preparing to finalise a deal, withdiscussions over a signing location already taking place.
“Over the weekend in the US, they’re already talking about [Chinese President] Xi Jinping coming to Washington to sign this,” said Federation Asset Management chairman Greg Bundy.
“The markets are telling us the deal is done and now they’re just working on the political aspects. We’re moving beyond economic policy and now debating the optics and the politics.”
Australian investors are also pricing in more optimism, with the local sharemarket sitting just 121 points shy of surpassing the record high of 6845.1 it set on July 30.
While there’s no certainty that record will be surpassed this week, a resolution to both the trade war and Brexit before the end of the year is likely to set the local equity market up for a strong 2020.
“For me, the underpinning will be super low interest rates,” Mr Bundy said.
“If we got one more cut or two more cuts, you could easily see 8000 [points] on the ASX next year.”
Stonehorn Capital Partners chief investment officer Sam Le Cornu said there was pressure on both the US and China to reach a deal soon, with Presidents Trump and Xi hungry for a breakthrough.
“The trade war is a zero sum game. China’s supply chain has been severely disrupted, China’s yuan has depreciated and foreign capital is nervous,” he said.
“Meanwhile, the trade war saga has not ‘Made America Great Again’ – the truth being Americans are paying for it through higher import prices.”
While optimism that a deal can be done is widespread, the market rally in the lack of any concrete deal has left the market heavily exposed to disappointment.
“Markets have done pretty well in the absence of any trade accommodation and one could surmise they’ve been predisposed toward thinking an agreement would come,” GSFM adviser Stephen Miller said.
“I’m a sceptic on this. I think the spin being put on this is it’s going to stop getting worse and that’s a good thing, but that might be all we can hope for.
“I’m not sure that going forward it will be enough for [the market] tensions to stop getting worse.”
He said even with a deal, the market was ignoringthe diminishing ammunition of central banks as global growth slowed.
“It doesn’t alleviate the fact markets are overly reliant on central banks to get them out of this and central banks are almost impotent to do anything about it,” Mr Miller said.
Despite the concerns about the global economy, bond yields rallied last week as optimistic investors reduced their defensive holdings.
The Australian 10-year bond yield rose to 1.29 per cent last week, its highest level since July 24, supported in part by expectationsthe Reserve Bank of Australia would be more hawkish on monetary policyin future.
Thursday’s labour force print will provide a major indicator for the market as to whether the RBA decides to cut rates at its December meeting orhold off more accommodative monetary policy until next year.
Forecasters at NAB, ANZ, Westpac, Morgan Stanley, Bank of America and AMP are predicting the unemployment rate will edge higher to 5.3 per cent on Thursday, increasing the likelihood of a rate cut in December.
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