Typically, after a week of intense market moves following a volatile FOMC day and a booming nonfarm payroll number, the next trading week has lots of follow through momentum. That is not this week, as President Trump intensifies the pressure for securing a trade deal this week, otherwise China will see tariffs rise from 10% to 25%. The weekend also produced major updates from Warren Buffett’s Berkshire Hathaway earnings (which saw more stock repurchases and a surging stock cash pile which is ready for more acquisitions) and their annual meeting, continued tensions in Venezuela and missile testing returns from North Korea. Busy geopolitical events will likely cloud a week that is full of important live rate decisions from the RBA and RBNZ.
Trade – Trump’s tariff increase threat
RBA & RBNZ – Easing watch alert
Korea – The North tests missiles again
Oil – Saudis to increase production
Gold – Firms up on trade concerns
It appears the trade truce between China and the US is coming to a close, as President Trump decided to press on the tariff accelerator, in hopes of expediting a framework agreement for a trade deal to be outlined by Friday. Trump’s tweet show his frustration with the speed of talks and China’s attempts to renegotiate. Talks resume in Washington DC on Wednesday when China’s top negotiator Liu He meets Lighthizer and Mnuchin for what is hoped to be the last round of talks before a final meeting between Xi and Trump.
Markets have heavily priced in a trade deal and Trump’s increased tariff threat may be unsettling for risk appetite for the start of the trading week. If talks completely fall off a cliff, we could see major pressure for US stocks, who are just a stone’s throw from record highs.
RBA & RBNZ
Commodity currencies are trading sharply lower following Trump’s tariff threat and growing bets that the we could see a fresh round of rate cuts from the RBA and RBNZ. Both central banks are having live meetings, while expectations are slightly higher for the RBNZ to cut, while the RBA may decide to push it off to the next meeting.
The RBA decision happens Wednesday, and the bank could downgrade their forecasts following softer Australian and Chinese data over the past month. While inflation has softened, economic growth and building approvals saw steep declines, retails sales, consumer confidence and employment change all posted significant rebounds.
The RBNZ has seen there domestic economy deteriorate a little worse than what the RBA has seen for their own. The labor market is showing signs of weakening and dismal wage growth might warrant two rate cuts this year by the RBNZ.
North Korea fired short-range ballistic missiles over the weekend, the first time since 2017. North Korean leader Kim Jong-un attended the test which is a new type of tactical guided weapon. Kim appears to be trying to get Trump’s attention to return to the table for sanction relief. Talks fell apart in February and many analysts do not expect a successful return of denuclearization talks between the US and North Korea. US Secretary of State Mike Pompeo stated there is still a path forward for negotiations and that the tests this week did not pose a threat to the US or South Korea.
Saudi Arabia is expected to deliver an increase in production to makeup for the Iran disruptions. Saudi Aramco has raised their prices to Asia and Europe while cutting prices to the US. Crude prices for Arab light are at the highest premium since July and current demand seems to be strong enough to handle the increase in Europe and Asia.
The focus has now shifted back to what will OPEC and allies do regarding their production cut agreement. OPEC not only needs to worry about a major reversal with oil prices, but they need to make sure they stay relevant and do not see members abandon the cartel. Crude prices may only stabilize on the announcement of a production cut extension by OPEC +.
Improving demand globally will prevent any major selloff, but it appears bullish bet on crude may be over positioned and we could see an easier path lower for prices. Production is expected to increase from the big three, American, Saudis and Russians, an environment that will be difficult for crude trade much higher, despite a slowly developing rebound in global demand.
On the Venezuelan front, opposition leader Juan Guadio noted he will not rule the option of working with US military, a move that would be frowned by most of the nation’s neighbors. Last week’s failed attempt by Guaido to overthrow Maduro was a major blow. The talk of working with the US may just be political posturing, but it could do Guaido political harm in long-run. If he is to defeat Maduro with US help, it would undermine his presidency.
The precious metal got a slight boost from the market concerns that a trade deal between China and the US should not be fully priced in. The yellow metal has underperformed on the overall improvement with global growth concerns and accommodative stances from most of the major central banks. Further easing from the RBA and RBNZ could provide an additional backdrop for higher gold prices, but it may be short-lived if we continue to see a rebound in Europe.