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The tensions were focused on a threat from US President Trump (no surprise there,) and were intensified when reports came that Saudi Arabia had intercepted a missile from Yemen heading to key infrastructure. While stocks and risky assets didn’t sell-off, they did pause their strong performance from Wednesday thanks in large part to the response from Chinese President Xi Jinping’s speech at Boao.
S&P/ASX slips despite outperformance of energy and miners: The Australian benchmark index fell by -0.48% to 5828.70 on Wednesday despite soothing commentary from Chinese President Xi Jinping at the Boao forum. The Chinese president pledged to lower tariffs and further liberalize the Chinese market, a sign that there may still be a window of opportunity to de-escalate trade tensions with the United States. Even with the energy and mining sectors up by +0.96% and +0.72%, respectively, bucking signs of weakened demand in China as the March CPI and PPI prints missed, weakness in utilities (-1.42%) and telecommunications (-1.52%) dragged down the S&P/ASX 200.
The Australian Dollar rode the second day of gains against the Japanese Yen and US Dollar but paused on the release of FOMC minutes from the March meeting that were interpreted as more hawkish than expected.
The Aussie remains a laggard of impressive commodity FX gains recently realized by the Canadian Dollar, New Zealand Dollar, and Norwegian Krone who benefited greatly from the strength in Oil and an erosion of trade war fears. Traders should keep an eye on Thursday’s Home Loans data in AU for February with an expected drop of -0.4% MoM. An upside surprise could allow the Aussie to join its commodity FX counterparts higher.
US inflation begins to get frothy, FOMC signals willingness for faster hikes: The March US CPI report showed inflation has started to move well-above the Federal Reserve’s +2% medium-term target, with the headline in at +2.4% and the core at +2.1% (year-over-year), as was expected. High inflation may soon present a policy conundrum for Fed officials, who are faced with sluggish Q1’18 growth estimates – the Atlanta Fed’s GDPNow growth tracker sees GDP in at +2% annualized. The conundrum: should the Fed raise rates to tame inflation, it risks tamping down growth; or if it keeps its rate rise cycle gradual, inflation could run even higher. The release of the March FOMC meeting minutes confirmed policymakers willingness to embrace a faster rate hike path should the data warrant it. Odds for four hikes in 2018, per Fed funds futures, have risen back above 35% after dropping below 25% at the end of last week.
Commodities gain appears to be Wall Street’s pain though, a rather muted one as President Trump’s threat of a pending missile strike on Syria caused US equities to drop for the first time this week. Toward the closing of the US session, the Wall Street 30 was lower by 0.5% with the NASDAQ nearly flat. A developing risk that has a historical tendency to get out of hand quickly is inflation, which the FOMC minutes noted were tilted to the upside and could eventually put negative pressure on earning’s margins.
Commodities appear to be the clear market winner as geopolitical tensions heat up. While the gains are volatile and the risks are there for downside risks to materialize most of the headlines are seen causing negative supply shocks that could further put upward pressure on price.
WTI Crude Oil traded to the highest level since 2014 with the largest trigger coming from reports that Saudi Arabia intercepted a missile fired toward Riyadh at key infrastructures. The two-day advance in Crude was nearly 6%, the largest over two sessions since November while the front-month futures contract also jumped showing an increasing premium for current purchases as opposed to purchases made at a later date.
While crude looks set to remain supported, metals also strengthened as Gold climbed for the fourth day and Aluminum neared the highest levels since 2012 due to a negative supply shock as Russian supplier, United Co. Rusal is a focal point of US recent sanctions.
The top headline event overnight was Mid-East Tensions as a combination of potential U.S. strikes against Syria and an intercepted missile from Yemen that was heading to Saudi Arabia’s capital city of Riyadh. The Syrian threat was initiated by Twitter when Trump warned Russia to ‘get ready’ for an attack on Syria, which he said Russia had promised to shoot down. Concerns are rising as the pro-Iranian Yemeni rebels are displaying greater military threat as the three-year conflict escalates. The Syrian showdown in progress has caused the Ruble to trade to a 16-month low.
Euro stays out of US-Russia spat over Syria, for now: It’s possible that a response by the United States and her Western allies could result in retaliatory measures by Russia towards the European Union, ensnaring the Euro in the recent fray. But Russia’s main leverage over Europe is the gas it exports to the region, a far more potent counterpunch heading into the Winter months rather than exiting them. We’ll be watching to see if Russia steps up military exercises in the Baltic region, as Estonia, Latvia, and Lithuania all use the Euro. Prolonged uncertainty and sabre-rattling could impact the airline industry in Europe, which would have a real negative impact on growth – thereby keeping the ECB on its easing path for longer than intended.
Markets Update:
SPI futures moved -28.29 or -0.48% to 5828.68.
AUD/USD moved 0.0008 or 0.1% to 0.7758.
On Wall Street: Dow Jones -0.62%, S&P 500 -0.16%, Nasdaq -0.05%.
In New York: BHP 0.9%, Rio 0.41%.
In Europe: Stoxx 50 -0.55%, FTSE 100 -0.13%, CAC 40 -0.56%, DAX 30 -0.83%.
Spot Gold moved 0.25% to US$1350.19 an ounce.
Brent Crude moved 1.35% to US$72 a barrel.
US Crude Oil moved 2.03% to US$66.84 a barrel.
Iron Ore moved -0.44% to CNY452 a tonne.
LME Aluminum moved 2.9% to US$2201 a tonne.
LME Copper moved 1.68% to US$6945 a tonne.
10-Year Bond Yield: US 2.79%, Germany 0.5%, Australia 2.68%.
Written by: Christopher Vecchio, CFA and Tyler Yell, CMT, DailyFX
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