Originally published by IG Markets
The markets are palpably uneasy heading into Thursday. Investors’ trade war worries were not assuaged by the appointment of Larry Kudlow – a CNBC personality and former Reagan administration official who favours free trade – to replace Gary Cohn as US President Trump’s top economic advisor.
US Commerce Secretary Wilbur Ross said he would reveal rules for granting exemptions to last week’s tariff increase “soon”, but this too fell flat. Futures pricing hints the risk-off mood is set to continue as Asia Pacific markets come online.
Wall Street unnerved by trade war fears: US shares turned lower Wednesday, with investors seemingly spooked by trade war prospects once again. Reports making the rounds across the wires suggested President Trump is preparing a broad package of trade restrictions aimed at China. Meanwhile, EU trade chief Cecilia Malmstöm said the regional bloc is “ready to act in a firm, resolute and proportionate way” in response to last week’s increase in US tariffs on steel and aluminium.
US retail sales data disappoints: February’s US retail sales statistics underwhelmed relative to consensus forecasts, showing a monthly drop of 0.1 percent. Economists were expecting a 0.3 percent increase. Sales fell in seven of the 13 spending categories tracked by the Department of Commerce. A drop in spending on vehicle-related spending emerged as the most potent headwind. Building materials purchases and non-store retailing – a category that includes e-commerce – were notable bright spots.
Euro drops on Draghi comments: ECB President Mario Draghi sent the Euro lower once again. Speaking at the “ECB and its Watchers” conference in Frankfurt, he worried aloud about subdued underlying inflation, reiterating that the central bank needs to see a sustained adjustment in price growth trends in order to end QE asset purchases. He added that past Euro strength could weigh on inflation down the line. Market-friendly outcomes in key elections – notably in France – led the single currency broadly higher, making it last year’s best-performing G10 FX unit.
New Zealand Dollar may fall on GDP data: Fourth-quarter GDP figures are expected to show New Zealand’s economy perked up, adding 0.8 percent in the final three months of 2017. The on-year trend growth rate is seen rising to 3.1 percent, marking the first acceleration since mid-2016. Recent economic news-flow has steadily underperformed relative to forecasts, however hinting analysts’ models are overly rosy and opening the door to disappointment. Such a result may weigh on the kiwi dollar as RBNZ rate hike bets are pushed further out into the future.
ASX 200 vulnerable to deeper losses: All 11 sectors of the ASX 200 dropped to bring the index down 0.66% to close at 5935, with futures indicating further pressure expected to come in follow through of selling in European and US equity indices on Wednesday. The sector owning the largest losses was Telecommunications.
Another way to see the capital flow into safe assets is to witness the fall across the curve in Australian sovereign rates, with the 2-year through the 30-year yields falling by roughly 2% across the board. Risk sentiment appears soured after the ousting of US Secretary of State Rex Tillerson seems to increase the probability of a tough stance on trade that could crimp the flow of global commerce. That may negatively impact Australian exporters despite the country being exempted from explicit US tariffs on steel and aluminium.
Commodities: Thursday marks the end of China’s winter curbs on metal production, meaning supply is likely to rise. Still, iron ore prices saw its first rise in eight days after plunging in the first half of March. As with energy, the large builds in supply are viewed first through the lens of demand. The strong start for China’s economy will need to extend when looking at factory output and investment in fixed assets for the aggressive rise in supply to be absorbed. If not, further selling like that seen in the first half of March could continue.
Weekly crude oil inventory data per the EIA had something for everyone. Bears were likely delighted by the crude stockpile build, while bulls are definitely focused on the large oil-product drawdown showing downstream demand remains strong. Another focal point for the bulls was the smaller than expected increase in US production of only 12k barrels per day. That may support new longs to enter, as institutional long positioning concentration has died down.
Global retaliation to US tariffs: Since rumours first surfaced about Trump’s trade tariffs and before exemptions were known, one view has held that the US Dollar Index was likely going to be collateral damage as capital flows into the US could slow down, and the dollar’s value could fall. In a word, what would likely cause USD weakness is retaliation.
News has surfaced that the EU is looking to apply a 25% duty on American made products ranging from motorcycles to bourbon while Chinese officials are studying trade penalties on US agricultural imports, which could hurt Trump’s support base of farmers in the pocketbook. Cofco Corp, China’s biggest food company has historically encouraged companies to buy US soybeans, with global trade around $14B, and they may look to use their steady purchasing as leverage in a war that likely has no clear winner. Another key leverage point owning to China over the US, though currently seen as unlikely to be employed, is that China has become the largest creditor to the US. A slowdown in Treasury purchases would almost certainly cause a shift in the US’ stance.