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Theoretically, the economic and financial implications of an opening volley of a trade war would be relatively straightforward: it would lead to risk aversion and an appetite for safety over higher yield. Yet, that wasn’t the case this past session. As a market, we are still harbouring a sense of complacency that seems to override traditional valuations which harken to the references to ‘animal spirits’ or the saying ‘the market can remain irrational longer than you can remain solvent.’ Yet, there is likely just as much a deer-in-the-headlights component to this situation. It is unclear what will be enacted, how motivated the retaliation will be and even whether speculation will even be moved by such a traditional theme. One thing is clear though: we will soon find out how much it matters to the market.
Wall Street: There was a notable bullish tone to European trade Thursday, but that enthusiasm wouldn’t build into a genuine trend with the clouds of trade wars looming on the horizon. The US indices certainly wouldn’t find their way through the cloud cover. While the day was bullish, there was notably a lack of momentum behind the market. A lack of fundamental drive in the short-term is bullish as the focus on tariffs would insinuate bears would be more productive should they take control. That said, the wide range of February and the progressive consolidation for the likes of the Dow and S&P 500 is going to put pressure on speculative interests moving forward. The low boundary ‘buy the dip’ strategy is no longer easy pickings. Mustering genuine enthusiasm near record highs requires more tangible support. Be warier of technical bearish breaks than bullish.
US and Canadian Employment: While much of the fundamental storm we are facing ahead will come in waves over the headlines, there is still some reliable, scheduled event risk to anchor expectations. While trade will continue its theme through the end of the week with UK and Germany figures due in the European session, the most market-moving potential centres on the jobs figures from the US and Canada.
To assess what kind of market reaction we see from the data, we should consider first why it matters rather than what degree of surprise the data reports. While employment trends are important measures of overall growth for both countries, the market’s preferred interpretation is for monetary policy influence. That said, NFPs and the jobless rate are not the missing ingredients for Fed pacing. Inflation is lacking, which will put the emphasis on wage growth. In Canada, the bar for the BoC is set significantly lower, so net change in employment alone can accomplish more of the lifting. Expect volatility, but be wary of calling any serious trends heading into the weekend.
Bank of Japan Rate Decision: The yen may rise as markets recalibrate BOJ policy expectations: A policy decision from the Bank of Japan concludes a busy week of official pronouncements from the world’s top monetary authorities. No changes are expected, but markets will be somewhat primed for a change in guidance. Last week, Governor Kuroda opined that neither tightening nor easing last forever, adding that the BOJ can consider unwinding stimulus if inflation hits the 2 percent target in the 2019 fiscal year as expected. The markets took this as borderline hawkish at the time and will be looking for confirmation in today’s announcement. They may be in for a disappointment, however considering how many times the BOJ has already moved the projected time when the price-growth objective will be met. That might push the yen broadly higher.
ECB Post Mortem: Euro pops, then drops on ECB policy announcement: The Euro was in for a wild ride as a much-anticipated ECB policy update crossed the wires. The official statement conspicuously omitted a pledge to “increase the asset purchase program (APP) in terms of size and/or duration” in the event that “the outlook becomes less favourable”. That sent the single currency higher. Those gains would be short-lived however as ECB President Mario Draghi all but walked back the guidance change in the press conference following the announcement. He said QE will continue until officials see a “sustained adjustment” in the inflation path, adding that “convincing signs” of a price growth pickup are still needed. He went on to say that underlying price pressures are “subdued” and cautioned against declaring victory. Tellingly, the central bank also lowered its inflation forecast for next year. That sent the Euro sharply lower, making for the biggest drop in three weeks.
ASX200: Australian stocks at the mercy of White House tariff stance: The path forward for Australian shares is likely to hinge on implementation details of a hike in US steel and aluminium tariffs, due to be triggered on 7 March at 20:30 GMT. President Donald Trump seemed to suggest that Australia might be exempt from the increase. If that is confirmed, metals and mining names are likely to push meaningfully higher, pulling broader market averages along for the ride. Indeed, the sector accounts for nearly 14 percent of the benchmark S&P/ASX 200 index. Needless to say, the absence of such a “carve-out” might have the opposite effect, although a wait-and-see approach may prevail following rumour-mill reports that all countries will have a 15-day window to negotiate a reprieve.
Commodities: US Dollar bounce weighs on commodities: Raw materials prices turned lower as the ECB-inspired drop in the EUR/USD exchange rate echoed as broad-based US Dollar strength around the financial markets. The cross accounts for nearly a quarter of all FX market turnover, so it is not unusual that the greenback’s performance here would have knock-on effects on its value against other currencies.
Australian Dollar: The combination of Australia’s surprisingly strong A$1.06 Bln surplus and the cooler-than-expected imports figures from China earned the Aussie Dollar little traction this past session. The AUD/USD dropped as much as 0.8 percent through Thursday’s active session, furthering a tightening range that started with the late-January reversal from 0.8135. Evaluating an equally-weighted index of all the major Aussie crosses offers up more of the congestion that has dominated the trading landscape for the past month. Despite its typical carry status which makes it highly reactive to risk trends, the AUD seems to be playing the role of a more stable counterpart to more active Dollar, Euro and Yen.
SPI futures moved 40.88 or 0.69% to 5942.87.
AUD/USD moved -0.0037 or -0.47% to 0.7788.
On Wallstreet: Dow Jones 0.08%, S&P 500 0.38%, Nasdaq 0.17%.
In New York: BHP -0.22%, Rio -1.17%.
In Europe: Stoxx 50 1.06%, FTSE 100 0.63%, CAC 40 1.28%, DAX 30 0.9%.
Spot Gold moved -0.27% to US$1322.04 an ounce.
Brent Crude moved -0.78% to US$63.84 a barrel.
US Crude Oil moved -1.42% to US$60.28 a barrel.
Iron Ore moved -2.75% to CNY496 a tonne.
LME Aluminium moved -2.33% to US$2097 a tonne.
LME Copper moved -0.77% to US$6950 a tonne.
10-Year Bond Yield: US 2.86%, Germany 0.63%, Australia 2.8%.
Written by: John Kicklighter, Chief Strategist, DailyFX