Global markets ended last week on the back foot, after trade talks between the US and Canada stripped traders of some hope that the global trade-war may be de-escalating.
1. Hopes dashed: It was hoped that, following the relatively positive developments in US-Mexico trade negotiations early last week, perhaps a change of tack was emerging from US President Donald Trump’s administration regarding global trade. Those hopes were quashed upon news that negotiations between the US and Canada had broken down – a situation that became more bitter after US President Trump lashed out at the Canadians in typical Trump-fashion on Twitter, stating there is “no political necessity” for the US to keep Canada in NAFTA.
It must be highlighted how market psychology applies to the matter of the US position on North American trade. For the great majority of market participants, it’s not NAFTA or the remodelling of that agreement that matters, but how those negotiations may reflect the White House’s position on trade with the likes of China and Europe.
2. European chill: Relations between the US and Europe appeared to chill again over the weekend, with President Trump taking a fresh swipe at European policymakers, while the implementation of the $US200 billion ($A278 billion) worth of tariffs on China looks more than likely to go ahead this week. Perhaps more pernicious than simply the effects of tariffs themselves is the uncertainty that a vacillating White House is having on markets as it refuses to give clear direction on trade-policy.
3. Dollar dazzle: The ultimate consequence of the trade uncertainty at the end of last week was a marked pull back in risk appetite and a subsequent play into safe havens. The US Dollar regained its gusto, climbing back above the 95.00 handle as measured by the US Dollar Index, pushing the EUR and GBP lower; while the USD/JPY proved the ultimate play to hedge and profit from market-fears, falling back to the 111.00 handle. US Treasuries were unchanged, though yields were several points lower than the week’s highs, while Wall Street indices were (on balance) flat, demonstrating their strength, after European shares ended its session collectively over 1 per cent lower.
4. Aussie dollar dive: Arguably the asset that suffered most from the disintegration in the trade outlook was the Australian Dollar, which tumbled to its lowest level since January 2017. Along with the NZD, the AUD has traded as a proxy for the US-China trade war, selling-off now by as much as 8 per cent from the start of the year. Following the very weak Capex figures last week, the out of cycle rate-hike from Westpac, plus the political uncertainty in Canberra, fundamental reasons to by the Aussie currency appears to be rapidly diminishing. If the bad news continues this week, support at 0.7160 looks very vulnerable, which if broken could easily open-up downside to the low-70 cent mark.
5. Retail test: The first test this week for the Aussie currency, and more broadly the Australian economy, will come today in the form of domestic Retail Sales data, which kicks-off a big data week for the local economy. Increasingly, the major concern for policymakers and economists is the growing weakness of the Australian consumer. Having binged on debt for several years against a backdrop in which wage growth has been effectively flat, households are looking evermore stretched, as the ability to spend and consume quickly evaporates. It’s a bad omen for economic activity, which when combined with the likely prospect of higher borrowing costs and cooling property prices, points to an RBA with little choice but to keep rates on hold for a long time yet.
6. Strong start: SPI futures are pointing to a strong start for the ASX200 today, even despite the dour local and domestic economic backdrop, indicating a 26-point jump at the open for the Australian share market. The bounce in the ASX comes following a tough day for the index on Friday, having suffered from a fall in materials stocks on the back of a sell-off in commodity prices amid heightened trade war fears.
This week may prove to be one of those paradoxical weeks for Australian shares, whereby the ASX climbs despite heightened global risk aversion and soft local data. The reason for this, if it occurs may come because of the recent sell-off in the AUD: the ASX200 in currency adjusted terms is 4.08 per cent lower, meaning any further falls in the currency could underpin further gains on the ASX.
7. Eyes on China: On a global scale, from today to the rest of the week, attention will be on the Chinese economy. In the day ahead, it will be the release of Caixin Manufacturing PMI figures that capture traders’ attention before the looming 25 per cent tariffs on China’s economy steals the focus. Fears that China may be heading for a precipitous slow down were assuaged on Friday, after the release of official PMI figures printed better than expected. Today’s Caixin data is generally considered more credible, with market participants seeking validation of the official figures in today’s numbers. Nevertheless, the USD/CNH has proven stable for several days, trading at 6.84 at present; although Chinese indices continue to struggle, apparently unwilling to change trend until a trade war resolution is achieved.
8. Market Watch:
SPI futures up 26 points or 0.4% to 6330
AUD -1% to 71.89 US cents
On Wall St: Dow -0.1% S&P 500 flat Nasdaq +0.3%
In New York, BHP -1.3% Rio -0.5% Atlassian +0.8%
Wall Street closed on Monday for Labor Day
In Europe: Stoxx 50 -1.1% FTSE -1.1% CAC -1.3% DAX -1%
Spot gold +0.3% to $US1203.62 an ounce on Friday in New York
Brent crude -0.5% to $US77.42 a barrel
US oil -0.5% to $US69.88 a barrel
Iron ore +0.7% to $US66.34 a tonne
Dalian iron ore -0.8% to 484 yuan
LME aluminium -0.4% to $US2124.50 a tonne
LME copper -1.5% to $US5975 a tonne
2-year yield: US 2.63% Australia 1.96%
5-year yield: US 2.74% Australia 2.13%
10-year yield: US 2.86% Australia 2.52% Germany 0.32%
US-Australia 10-year yield gap: 34 basis points
8. Market watch:
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