Trader thoughts - the long and short of it

Risk aversion grows increasingly tangible this week as the US and China escalate their economy-threatening trade war.

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Source: Bloomberg

Wall Street starts to seriously worry over escalating trading wars: The sharp increase in threats by the President Trump late Monday triggered further retreat in the range of assets that carry a ‘risk’ designation. Tracing the reaction from the massive slide from the Shanghai Composite in China to the hefty German DAX gap lower showed it would not be a concern isolated to the two countries directly escalating tariffs. To this point, US indices have remained have kept the bleeding under control; but it is increasingly difficult to paint the optimistic view of the progressive slide. The ‘blue chip’ Dow has slid for six consecutive trading days for the worst series since March 27, 2017. The broaderS&P 500 has seen another sharper gap down on the open yet again attempted to retrace those early loss through the session’s trade. It is the tech-centered Nasdaq that we should watch more closely at this juncture as it carries the signature of speculative excess with a concentration in the best performing sector in the best performing regional asset class (US equities over the past decade). It broke 7,200 where its advancing trend line support stood to start the day but later traded back above. The cracks are showing.

Another massive jump in the trade war threats: Late last week, the US announced it was moving forward with its $50 billion in tariffs against a list of Chinese products aimed at answering what the government considers unfair trade practices, particularly with intellectual property theft. Despite the probability of the move, Chinese officials responded swiftly to the move by cancelling the terms of recent negotiations to increase purchase of US-made goods and in place announced in-kind tariffs against the country. What followed late Monday / early Tuesday is the evidence to the markets that this situation is not based on mere bluster but instead can readily progress into GDP-stifling policy. President Trump warned that if China went through its own response to the US announced tariffs, they could add an additional $200 billion in import taxes. This is not merely small steps towards escalation but instead rapidly escalating threats. Even with complacency so deeply rooted and market participants fully accustomed to doubting financial disasters can befall them, it is difficult to write off this enormous threat.

Commodities ease across the board, but oil and gold still the focal point: There was a broad retreat in commodities this past session from natural gas to copper to wheat. The escalation of trade wars with its natural implications for global growth trends are another great barometer of how concerned the financial system is over the bottom line economic implications from this diplomatic spat. Watching the asset class as a whole gives considerable insight, but two assets in particular still offer a perfect complement between the pointed actions and big-picture fears: crude oil and gold. US-based WTI crude oil dropped through Tuesday’s session as Iran’s Oil Minister cooled expectations that the OPEC meeting would result in any changes for the group’s output – voicing particular consternation that adjustments would be made to meet the US President’s requests. As for gold, the metal slid like most other commodities this past session: unexpected from a safe haven asset. The drive for this unexpected move was the Dollar’s strength, which could quickly flip should the United States’ role in escalating trade wars be recognized as a direct threat to the country and its currency.

ASX 200 erases financials-driven gains on Sino-US trade war fears: Australian shares finished Tuesday’s session essentially flat, erasing an intraday gain of as much 0.7 percent. The overweight financials sector continued to be supportive in the aftermath of last week’s Fed and ECB policy announcements, with investors expecting an upshift in global borrowing costs to be supportive for lenders’ margins. Losses in the materials space proved to be overwhelming however amid worries about an escalating Sino-US trade war. Washington and Beijing exchanged barbs in early Asia Pacific trade, with US President Donald Trump publically asking officials to identify a further US$200 billion of imports to subject to tariffs and China signaling they are prepared to respond in kind. Metal and mining stocks shed 1.6 percent amid fears that the spat will disrupt supply chains critical to Australian exporters. SPI futures are pointing cautiously higher ahead of Wednesday’s opening bell in Sydney but a negative lead from Wall Street – including heavy losses for bellwether Rio Tinto and BHP Billiton ADRs – hint trade-related jitters may undermine upside momentum.

Day three of the Sintra forum offers the highlight: It is currently difficult for monetary policy to wrestle the market’s attention back from the trade wars; but if there is a chance of doing it, the greatest potential would rest with the third and final day of the ECB’s central bank forum in Sintra Portugal. We have seen a range of speakers from the key policy authorities weigh in with the anticipated caution and equal parts optimism. Few exceptional statements have been made or policy intentions insinuated. The highlight thus far has been ECB President Draghi’s reinforcement of his group’s dovish upgrade last week where they extended their QE program another three months and attempted to curb speculation of rate hikes. Yet, for this final day, the panel bringing together the head of the ECB (Draghi), Fed (Powell), BoJ (Kuroda) and RBA (Lowe) will produce material insight on global monetary policy whether intended or not. Bringing together leaders on groups whose policy is diametrically opposed to each other – the Fed hiking four times this year and the BoJ refusing to even signal an end to massive QE purchases – will highlight inconsistencies. How can these groups be on such different courses when their growth, inflation and financial stability are supposedly not that different? Expect the market to be skeptical.

NZ dollar may fall as current account, GDP data cool push back RBNZ rate hike bets: First-quarter current account data is expected to show a larger drag from the external sector on overall economic growth than in the three months to December 2017. The net balance as a share of GDP is expected to print at -2.8 percent, the worst result in two years. That bodes ill for the GDP report itself, due out the following day. Analysts already expect a slowdown to bring the trend growth rate back to 2.7 percent, matching the four-year low set in the third quarter of 2017. Results echoing the recent deterioration relative to forecasts in New Zealand economic data outcomes might prove to be more dire still, weighing on RBNZ rate hike bets and pushing the Kiwi dollar downward. As it stands, a rate hike is not expected until the second half of 2019.

AUD/USD sinks to 13-month low as US, China trade spat deepens: The sentiment-linked Australian Dollar plunged alongside global share prices as trade tensions between the US and China appeared to deepen, pushing the AUD/USD exchange through support marked by May’s swing low (0.7413) to the lowest level in 13 months. From here, the next downside barrier is marked by a chart inflection point at 0.7335, with a break below that confirmed on a daily closing basis exposing double bottom support capping losses since May 2016 in the 0.7145-65 area. Alternatively, a reversal back above 0.7413 – now recast as resistance – paves the way for a retest of the 0.7500 figure.

Market Data:

SPI futures moved -2 or -0.03% to 6102.12.

AUD/USD moved -0.0001 or -0.01% to 0.738.

On Wall Street: Dow Jones -1.15%, S&P 500 -0.4%, Nasdaq -0.28%.

In New York: BHP -2.72%, Rio -3.7%.

In Europe: Stoxx 50 -0.9%, FTSE 100 -0.36%, CAC 40 -1.1%, DAX 30 -1.22%.

Spot Gold moved 0% to US$1274.72 an ounce.

Brent Crude moved -0.42% to US$75.02 a barrel.

US Crude Oil moved -1.2% to US$65.06 a barrel.

Iron Ore moved -0.77% to CNY451.5 a tonne.

LME Aluminum moved 0.7% to US$2219.5 a tonne.

LME Copper moved -0.8% to US$6964 a tonne.

10-Year Bond Yield: US 2.9%, Germany 0.37%, Australia 2.62%.

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