The debilitating aspect of both stories is the sense of randomness and chaos surrounding each. Regarding emerging markets, the concern is how challenging it is to judge what exposure developed markets have to the various issues plaguing them; regarding the US-China trade war, the perception is becoming that US President Trump lacks a substantive plan and is simply shooting from the hip. The week ahead may well be defined by the search for clarity and certainty, two things traders appear to have abandoned in recent weeks.
The sell-off in response to the broad sweeping macroeconomic problems confronting markets is beginning to manifest in (thus far) resilient US equity markets. Despite the wide-based falls in Asian and European indices last week, the major US indices appeared (on the surface) to shrug-off emerging market and trade war concerns for the better part of the week’s trade. Instead, US markets traded primarily off the potential regulatory impact to US tech stocks of a congress enquiry into the sector and how it has been exploited to influence US civil society: the NASDAQ lost 2.3 per cent for the week, and the S&P500 finding itself dragged over 1 per cent lower. It was only on Friday that US markets began to demonstrate signs of stress, with the trade-sensitive Dow Jones dipping back below 26,000.
It was on the back of a new escalation in the US-China trade war on Friday that drove global equities lower, establishing a negative lead for the week ahead. Following the end of the so-called consultation period for the proposed $US200bn worth of tariffs from US President Trump’s administration on Chinese imports, US President Trump informally announced his intentions to slap tariffs on additional $US267bn worth of goods. The total sum would encompass effectively all imports coming from China into the US, marking an almost complete break-down in the trade relationship between the US and China. The MSCI World Index fell to new one-year lows in response to President Trump’s comments, as hopes fade that the President will repress is protectionist impulse.
The risks relating to global trade diverted attention from Friday night’s major US Non-Farm Payrolls release – the final before the US Federal Reserve’s highly anticipated meeting on September 26th, at which the Fed is all but certain to hike interest rates. To the presumed delight of policy makers, the NFP release showed another bumper set of numbers, with the US economy adding another 201k jobs last month – enough to support a 3.9 per cent unemployment rate despite a climbing participation rates. The most welcomed detail in the release however was wage growth figures, which showed an above forecast boost in worker pay of 0.4 per cent last month, to take annualized wage growth of 2.9 per cent.
The response to the remarkably positive US NFP release was considerable. Interest rate markets swiftly priced in a greater probability of two more interest rate hikes before the end of 2018 and boosted bets that the Fed would maintaining its hiking cycle into 2019. US Treasury yields ticked up across the curve consequently, driving the yield on benchmark 10 Year Treasuries to around 2.94 per cent. The anticipated higher yields sparked a broad rally in the US Dollar, pushing the US Dollar Index around 0.5 per cent higher to 95.35, as the EUR/USD tumbled back into the 1.15 handle and the GBP/USD below 1.30 once more.
The Australian Dollar suffered because of the stronger greenback, breaking through oft-quoted support at 0.7160. As had been predicted, the clearing of that level ignited a bout of heightened selling of the local unit, sending it to two-and-a-half year lows. The latest fall in the AUD/USD comes following several weeks of selling, courtesy of growing fears that global growth will be severely dented by global trade wars. The currency now looks exposed to further downside from here, as the psychologically significant 0.7000 mark opens-up with limited support, a level that looks even more likely to be reached given the RSI presently sits above oversold levels.
SPI futures are indicating a 23-point drop at the open for the ASX 200, in a day that shapes up as another challenging one for the Asian region. The calendar is bereft of local economic data today following the last fortnight’s slew of domestic releases, with most interest to be directed toward Chinese CPI data this afternoon before European markets prepare for UK GDP tonight. Having pulled back from its decade long highs, the fortunes of the ASX will hinge on whether bearish sentiment can ease in the face of trade war and emerging market related risks. IG data is suggesting markets are about 67 per cent long on the ASX currently, however the continued climb in the VIX above 15 suggests that a challenge of support of 6140 is likely today.