Prepared by Jeff Halley, Senior Market Analyst
Tariff-geddon taxes global markets
The fallout from the Trump’s threatened Friday tariff-geddon gathered pace overnight. Wall Street retreated sharply as expectations increased of a U.S.-China trade talk stalemate in a somewhat delayed reaction to Sunday’s social media bombshell. Unsurprisingly, U.S. Treasury yields moved lower, and the U.S. Dollar and Japanese Yen (JPY) ratcheted higher as investors rotated into safer harbours at the expense of emerging markets. On Wall Street it was a sea of red with the S&P 500 falling 1.65 per cent, the Nasdaq falling 1.96 per cent and the Dow Jones falling 1.79 per cent.
It has and continues to be the author’s thesis that global bond markets have been signalling a global slowdown is coming for some time. There are slowdowns, and there are slowdowns. The U.S.-China trade deal is the critical determinant of how deep or shallow the downturn will be. With global interest rates mostly at or near record lows except for the United States, the world’s central banks are ill-placed to cut rates to stimulate growth as they reap the harvest of their excessively easy monetary policies of the last ten years. In this context, the importance of the trade deal can be clearly noted.
If stocks were falling like birds from the sky overnight, it is another flightless bird from down under, the Kiwi, that will have Asia’s attention initially this morning. At 10 am Singapore time, the Reserve Bank of New Zealand (RBNZ), will in all likelihood cut rates to record lows of 1.50%. A rate cut has been baked into the New Zealand Dollar’s (NZD) price for some time now; the real interest will in the statement and press conference one hour later. There we will see if the cut is one and done or there are further cuts in the pipeline. The RBNZ’s conundrum is a familiar one to many central banks, an economy cruising along nicely but elusive inflation still ten years after the global financial crisis.
China’s trade balance is also released at 1100 Singapore time but will in all likelihood be ignored. Asia prefers to look nervously at Wall Street’s overnight losses and that dirty two-word phrase, trade talks.
The JPY rallied strongly against the dollar with Japan’s return from the extended Golden Week break, putting it in a club of one. USD/JPY has fallen 0.50 per cent overnight to 110.20 with the JPY’s haven credentials being well and truly put on the table. Yen typically rallies in times of stress and its strength this week is a clear warning shot of potential volatility ahead.
Elsewhere, it was business as usual as greenback bulldozed all before it as high yield haven currency of choice for 2019. The fall in U.S. Treasury yields overnight is clearly signalling the U.S. bond market as the harbour of choice for investors to let the storms past and that will continue to support the greenback.
With the Australian and New Zealand Dollars hovering above key supports, emerging Asia currencies will likely feel the chill winds as well in today’s session as part of a global EM retreat.
Both Hong Kong and China managed small bounces yesterday after Monday’s heavy losses. That is unlikely to be the case today given Wall Street’s heavy sell-off overnight. In all likelihood, Asia’s stock markets will be a sea of red today as investors focus on global growth threats and head for the doors.
Regional stock markets are particularly vulnerable to trade-talk jitters given their high beta to trade with China. With the trade talks restarting tomorrow in Washington D.C., we will need to see concrete progress and quickly to lift Trump’s tariff-geddon on Friday. Until then, it is hard to see the monsoon clouds hanging over Asia’s regional markets clearing.
Oil followed the trade talk playbook to the letter with both Brent Crude and WTI crumpling on global growth fears. Brent fell 2.45 per cent to $ 69.50 a barrel closing below $70.00 support. WTI fell 1.75 per cent to $61.15 a barrel with the $60.00 a barrel region next in its sights.
Following the FX and equity playbook, it is hard to see Asia being anything but downcast on oil’s prospects and positioning itself accordingly. Black gold will remain gloomy until we get more clarity from Washington D.C this week.
Gold managed an asthmatic 0.35 per cent rally to $1284.50 overnight in yet another underwhelming performance that will have bulls very concerned. Gold should be benefiting from the turmoil in global markets, but stubbornly refuses to gain a shred of upside momentum. $1300.00 may as well be a million miles away and if Friday’s tariff-geddon is avoided or postponed one cannot help but feel concerned for gold’s prospects.