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Granted, the bulk of Australian financial market participants were off for the Easter Monday holiday, but most markets were still open and reacting to a number of geopolitical concerns. It seems the focus is now firmly on future missile tests from North Korea and whether any future tests will actually be successful. From here, it would all be down to Mr. Trump and his allies and what their reaction would be, but we can believe that markets will not take kindly to this. For now, though the hope is on an increased prospects for talks, potentially incorporating China more into any negotiations.
Mike Pence has given a fairly blunt assessment of the situation in a New York Times article detailing 'Trump essentially has three choices: a military strike that could ignite a full-blown war; pressure on China to impose tougher sanctions to persuade the North to change course, an approach that failed for his predecessors; or a deal that could require significant concessions, with no guarantee that North Korea would fulfil its promise.'
One suspects the concerns in North Korea has further to play out, especially when we see headlines of 'North Korea UN envoy Kim warns of risk of nuclear war'. With this in mind, there will be a strong focus on next week's meeting between the Russians, the US and the United Nations to discuss Syria and North Korea. Although a week seems a long time in markets, as mentioned previously, there is a concern of further missile testing in the near-term.
The reaction on the Asian open yesterday was to predictably sell risk. We saw S&P 500 futures down close to 1% at one stage, with the US ten-year Treasury as low as 2.19% and USD/JPY trading down to ¥108.13. However, as we entered the later stages of European trade there has been some covering of these bearish trades and we have been left with somewhat of a flat lead for the ASX 200.
Perhaps the view that there is the potential for open dialogue has been the key here and we have seen USD/JPY heading back to ¥109, with the ten-year treasury pushing back to 2.24%. ‘Real’ (or inflation-adjusted) yields have reserved strongly (to 35bp) and this has been the key reasoning why gold has sold off from $1295 to currently sit at $1284 – to stand largely unchanged from the ASX 200 close on Thursday. US equities have performed admirably in the face of angst towards the situation in North Korea, helped by a strong rally in US banks, tech and consumer discretionary names, with 94% of stocks higher on the day.
With SPI futures closed on Friday and Monday, perhaps one way to conceptualise the ASX 200 open is through the fact S&P 500 futures are trading at similar levels as we closed on Thursday - so this seems like the best, most reliable lead. Another aspect of note were some fairly punchy falls in bulk commodity futures, with iron ore and steel futures (traded on the Dalian exchanges in China) falling 2.5% and 1.3% respectively. Spot iron ore has closed down 3.5%. BHP’s American Depository Receipt (ADR) closed down 1.7% if we use this as a proxy for all things mining.
AUD/USD hasn’t really followed the moves in iron ore, trading up to $0.7600, although we are seeing better selling coming into the pair here.
For those who missed it, China released solid growth numbers yesterday, with Q1 GDP increasing 6.9% and giving authorities’ increased breathing room to archive the 'around 6.5%' growth target. Chinese data in Q1 has been positive in general through both the official and private surveys, which has come amid a modest tightening of financial conditions. The wash-up though we are left with is that Chinese traders are sensing tighter liquidity through the increased costs of borrowing from the central bank for short and medium-term loans.
Traders are expecting tighter monetary policy, although this is debatable given the drop of late in M2 money supply, but we are certainly expecting further through its macro-prudential assessment. The interesting reaction was seen in the Chinese equity market, where the CSI 300 fell 0.7% on the data. So we can deduce that good news in China is now taken firmly as bad news by markets, on the idea of tighter financial conditions. The prospect that we have seen peak positive growth in China is in play and the growth rate should gradually move lower from here.
I would caution against becoming too concerned though, especially ahead of the leadership change later in the year. It seems highly likely authorities will want to see a strong economy and financial markets as we roll into that situation.
So the wash-up is we start the week on a flat note, although it could have been more negative affair given what was shaping up yesterday. It promises though to be an interesting week, especially with such heightened concerns at a geopolitical level, 17% of the S&P 500’s market capitalisation reporting and the final stages of the French elections upon us.