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China Tariffs Over Intellectual Property Coming

Published 14/03/2018, 09:44 am
Updated 06/07/2021, 05:05 pm

Originally published by AxiTrader

Welcome to my daily Markets Musings.

You’ll have already noticed that I’m writing a little more above the line these days and less in the “Here’s What I Picked Up Section” – that’s because feedback from some readers is they are time poor and would like a bit more in the elevator bit – what went up what went down – because they find the whole note daunting.

I’d love to hear what you reckon so as always, feedback iswelcome

Greg

Market Summary (7.45am)

It’s clear Donald Trump is and always has been his own man. What’s also clear is that he wants those around him to do as he bids. He has a vision of the world that has been reinforced in its correctness by the fact he’s been successful in business, won the presidency, and gotten North Korea to the negotiating table – among other things.

It’s the vision, born of these successes, that President Trump seems to also believe will bring Iran, China, and maybe even the EU to heel.

So this morning the news is that Secretary of State Rex Tillerson is out, to be replaced by the hawkish CIA boss Mike Pompeo. Tariffs, to rein in China’s aggressive IP infringements, are on the way in it seems. And Iran and Russia might take more than a passing interest in the new Secretary of State.

Geopolitics folks.

Stocks and bonds are cautious of both events with Europe equites closing down on the Tillerson news. The DAX lost 1.59%, the FTSE 1.05% and in New York the S&P 500 fell 0.63% while the Dow is down a similar amount and the Nasdaq lost around 1.19%.

Naturally after a fall yesterday on the ASX SPI futures traders have lopped another 34 points off the March contract to 5,934.

Bonds are lower though with the benign US CPI , 0.2% and 2.2% headline yoy, and clear tilt toward increased geopolitical risks putting a bid tone into the market. 10's are at 2.84%, the 2's at 2.26% so the curve is flatter again now at 58 points. The big 30-year auction went off well also underlying the better bid tone in bonds.

Gold has also caught a bit of a bid and while it’s only $5 an ounce to $1327 it is around $11 off the overnight low.

As goes gold and bonds on days like these so goes the yen which was trading, in US dollar terms, up near my stop overnight making a high of 107.28ish before USD/JPY fell back to 106.49 this morning. Likewise the Australian dollar peaked at 0.7897ish overnight but lost ground and is at 0.7847 as I write.

Elsewhere in currencies the Tillerson news and the not scary CPI hit the US dollar which is at 89.69 in US Dollar Index terms as the euro has caught a bid as well and is up at 1.2388. The pound is stronger as at 1.3963 – both have gained a little under half a percent against the US dollar. The Canadian dollar has been absolutely belted after BoC governor said he doesn’t know when rates will go up again – buy stops have been going off this morning in USD/CAD which is at 1.2971 up 1.06%.

Elsewhere the concerns over shale oil production are starting to grow louder. WTI and Brent are lower as a result and looking rather wobbly now on the charts. WTI is off 1.32% and Brent is 0.72% lower. Copper managed to buck the trend though with a 0.4% gain amid what was a down day for base metals.

On the day it’s Westpac consumer sentiment as the key thing I’m focussed at domestically. Of note I’ll be looking at the unemployment expectations index to see if it mirrors the amazing leap higher in employment intentions the NAB’s business survey showed.

Of course the triple treat of Chinese data – retail sales, industrial production, and urban investment, will be important as will the minutes to the latest BoJ meeting. Tonight’s German inflation will be watched closely as will speeches from ECB boss Mario Draghi, his deputy Vito Constancio and his chief economist Peter Praet. EU employment and industrial production along with US PPI data will also be worth watching.

Here's What I Picked Up (with a little more detail and a few charts)

International

  • Yesterday I asked what can I say about Vladimir Putin and today I am getting a little more concerned about the whole global geopolitical situation. Readers know I am a student of history - economic, ancient, and modern – and it is through this lens and in a helicopter a mile up that I see chess pieces being moved all around the board that concern me. I don’t have answers, just a lot of questions. And I raise this in a note on markets because if I have questions then investors will too and that will just add another layer of complexity to what has suddenly – in the past couple of months – become a much more uncertain outlook. Whereas January was the start of possibly 2 full years of solid and synchronised global growth now it seems with tariffs, trade battles, and geopolitics there are wrinkles you couldn’t fix with an iron the size of Mt Rushmore.
  • And on Russia, I really do wonder what the heck is going on. We’ve seen what appears to be a targeted attack on British soil which the UK and US governments have slated home to the Kremlin. We’ve seen the UK talk about not going to the World Cup, we’ve seen threats that RT will be kicked out of London and counter threats that no UK press organisation will work in Russia. Most troubling we’ve seen Russia threaten the US if it does anything in Syria against the Assad regime that puts its troops in danger AND AND AND a Russian foreign ministry spokesman commenting on the UK claims about the poisoning that “one should not threaten a nuclear power”. It’s been a long time since global glasnost was under so much pressure and from so many sides.

Image
Source: Twitter Screenshot

  • Then, of course, we throw in China. I couldn’t agree more with Bloomberg’s Lisa Abramovicz who tweeted overnight that if the US Administration targets China over intellectual property infringements then “it will likely make bigger economic waves than steel and aluminium tariffs”. Spot on and dead right. With Mike Pompeo as the new SoS the Administration seems to be taking a more pro-America and hawkish tilt. Indeed Zero hedge has tweeted this morning that Pompeo said China is a greater threat to the US than Russia. Watch this space folks.
  • Certainly, the Germans are watching. Recall a couple of weeks back when I said Geely might be the last Chinese firm to be able to buy into an iconic western company in an unfettered manner? Things are moving in that direction with the FT reporting overnight that – the “backlash grows over Chinese deals for Germany’s corporate jewels”. Key here is President Xi’s elevation to ruler for life and his transformation of many arms of government and regulators together with the re-centralisation of the CCP at the heart of the Chinese economy means not even private Chinese companies will be viewed as state sponsored. The world has gotten a lot smaller, globalisation is in retreat.
  • And at around 7.35am this morning news broke, from “sources”, that the Trump administration is preparing tariffs on up to $60 billion in Chinese imports. The targets would apparently be tech products and telecoms.
  • So it is no surprise stocks are a little lower and the VIX is up at 16.39 this morning. That’s a long way from 50 when we had our little volatility tantrum a while back. But it’s roughly 50% higher than where we saw all of last year on average. That will effect return expectations. That will effect asset allocations. And while I am not calling a crash in stocks today or tonight there is a strong probability – I’d give it 70% - that we see the February lows taken out in the months ahead.
  • In the current environment, we’ll know if I’m wrong or right by watching the moneyflow. So I’m going to try to report as much of that in this note as I can. To wit, Thomsen Reuters Lipper unit reported overnight, “fund asset groups (including both mutual funds and ETFs) took in net new money of $2.4 billion for the fund-flows week ended Wednesday, March 7. The net inflows were driven by money market funds (+$12.7 billion) and municipal bond funds (+$407 million), while equity funds (-$9.8 billion) and taxable bond funds (-$898 million) saw money leave”.

Australia

  • BOOM! That’s all I can say about the NAB business survey which was released yesterday. Ah, okay – BOOM< BOOM< BOOM. What a cracker it was with conditions higher and employment through the roof. I’ll let the data speak for itself. Some of the numbers seem almost rogue they are so strong. Look at the employment index leap from +6 to +16. That’s seriously boom territory. So you have to wonder why the AIGroup is trying so hard to keep the minimum wage increase below inflation.

Chart
Source:NAB

  • But a booming business sector does not lift a local stock market assailed by offshore headwinds and fears of changes to imputation. So the market was lower yesterday and will be so again today with SPI traders lopping another 35 points or so off where prices closed yesterday afternoon. Oops, is the best thing I can say about the price action as the SPI slips out of the little trendline I drew. My target is 5,861 now.

Chart

  • The Australian dollar was doing very well at one point overnight trading up to just a little below 79 cents with a high around 0.7897. But as risk aversion has risen this morning the tractor beam of that and the weakness in other supports like commodity prices recently has finally taken a toll. AUD/USD is at 0.7855 now off a low around 0.7845 and it’s this 0.7840/45 level that is the key for me. A break and we could easily see the Aussie down 78 cents, possible lower.

Forex

  • It’s a mixed up morning for forex markets after a complex night of varying moves among the US and cross rates as each individual currency reacted to the multiple stimuli and inputs of the past 24 hours news. The Euro and yen are the biggest winners both in real terms and in relative terms on the back of the benign CPI and rising geopolitical tensions. That combination, along with a rally in sterling has seen the DXY come under pressure.
  • At a time like this its clear that relative data flow and growth rates don’t matter as much but it is worth highlighting once again that the US economy, and the Fed, appear to be in a different place – very different – to Europe, Japan and their respective central banks. But folks that doesn’t matter. If risk aversion rises I’d expect the Yen to do best. Indeed I’m not sure a real bout of risk aversion wouldn’t knock euro and the pound for six. Something to watch.
  • Looking at my forex chart of the day then USD/CAD has fairly soared on the back of risk aversion, commodity prices, and comments from BoC governor Poloz which really signaled rates are on hold for a while. Of course his comment that he doesn’t know when next rates will rise simply means he is data dependent. But for the market that reads as dovish. So we saw USD/CAD bounce sharply off trendline support. We’ll see how it goes at the recent highs a break would suggest a 3 big figure run.

Chart

Commodities

  • Oil is still about US shale. Or at least the dominant narrative right now is about the production of shale and its impact on prices. And that is dampening sentiment toward prices even though OPEC is doing its best to jawbone the markets. Throw in slowly building inventories and prices that don’t seem to be able to get out of their own way and break higher and we have a market at risk of a drift.
  • In my video yesterday I said WTI could head toward $58.50ish which is the recent low and around 38.2% retracement of the big rally. I still hold that view. But it obviously has to breach the recent range low at $59.95 first.

Chart

Have a great day's trading.

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