Today’s Podcast

Phil Dobbie talks to NAB’s Rodrigo Catril about the market reaction. Plus, an election this weekend in Italy, the SDP vote in Germany that could determine whether another general election is imminent, and Theresa May’s response to the EU – what’s her answer to the Irish border question?

https://soundcloud.com/user-291029717/trump-rolls-out-steel-tariffs-politics-dominates-europe

Overview

• Trade threats trump strong data
• Equities and UST yields are lower again
• And after initially holding its ground, the USD succumbs to the fall in UST yields
• Mixed Fed messages ignored for now

Risk sentiment has taken a beaten in the past few hours after President Trump confirmed that he plans to impose import tariffs on steel and aluminium next week. US equities were struggling earlier in the session, but the announcement triggered a sell-off across the board with steel and aluminium companies the notable exceptions. UST yields are lower with the move led by the 5y part of the curve and after initially holding its ground, the USD has come under pressure in the hour. The line in Jimmy Barnes working class man lyrics “ he’s a steel town disciple” almost made it into today’s title, but I just couldn’t passed up the chance to use Superman (man of steel) by REM or Eminem!

After a mixed Asian session and a soft European close, US equities opened under pressure, but then settled into a sideway pattern. This all changed in the afternoon session after President Trump confirmed his plan to impose new tariffs on steel and aluminium next week. Trade war fears and potential impact on inflation sparked a sell  off in risk assets and a bid for  US Treasuries. The Dow, S&P and NASDAQ now look set to end a third day in a row with negative returns and after five days of trading with a 1 in front of it, the VIX index currently trades around 23.

Risk aversion rather than concerns over additional inflationary pressures has seen UST yields move lower along the curve with the 5y tenor leading the way, down 5.4bps to 2.587%. Earlier in the session, UST yields moved a little bit lower following slightly dovish comments from Fed Chair Powell before his Senate appearance. The Fed Chair said that he sees no signs the US economy is overheating even as the outlook for growth strengthens and the labour market tightens, he then added that he didn’t see “any strong evidence yet of a decisive move up in wages.”. The move lower in yields was then reversed after Fed Dudley said that he was ‘even more confident’ in pursuing rate rises adding that “four rate rises in 2018 would still be gradual”.

Meanwhile on another day, the unexpected jump in the ISM manufacturing (60.8 vs 58.7 exp.) to its highest level since May 2004 would have been a catalyst for a bid in risk assets and higher UST yields, in the end however trade threats trumped the strong data. Notably too, all the key subcomponents of the survey were strong with the ‘prices paid’ index rising to its highest level since 2011 and, encouragingly ahead of payrolls, the employment index also rose to near mutli-year highs. US PCE data was also out overnight, core PCE prices were +0.3% m/m in January, matching consensus, leaving the yoy number unchanged at 1.5%.

When I walked in this morning and looked at the screens, the USD was little changed and the AUD and CAD were the big underperformers. My rationale at the time was that the AUD was still suffering from yesterday’s soft capex report while news of US tariffs and implicit concerns over trade war appeared to have weighed the most on the CAD (Canada is the US’s largest foreign supplier of steel) and partly on the AUD, given the openness of both the Australian and Canadian economies. The odd one out at the time was the Kiwi, which was outperforming the USD. That all changed in the past hour, the USD appears to have succumbed to the move lower in UST yields and now the greenback is softer across the board. Early in the session DXY was threatening to make a break above 91 and now the index is at 90.30,over half percent lower in the past hour.

After trading to an overnight low of 0.7713, the AUD has essentially erased all the losses post yesterday’s capex report and at 0.7763, the pair is essentially unchanged over the past 24 hrs. NZD (@0.7256) and NOK (@7.84) are the top performers up 0.76% and 0.60% respectively and the Euro is  not far behind up 0.57% and currently trading at 1.226. We remain cautious on the broad USD sell-off, if Trump’s decision to impose tariffs triggers a retaliation by the US main trading partners, a trade war is not just a negative for risk assets, it is also a negative for small and open economies such as Australia. Thus, we wouldn’t be surprise to see the big dollar regaining its poise against currencies such as the AUD, CAD and NZD. Meanwhile safe haven currencies such as JPY and CHF are likely to be the winners with the Euro not too far behind.

As for commodities oil prices are softer, although they have settled a bit in the past hour. Copper and nickel are also a bit lower and iron is unchanged.

Coming Up

• NZ Consumer confidence and building permits are out in NZ this morning and the focus will be on whether the recent decline in residential building consents is another head fake or not.
• Is a busy morning for Japan with January’s labour market data ,household spending (Jan) and Tokyo CPI (Feb) all due for release. The Tokyo CPI reading  tends to be a good leading indicator for the national reading and after the big jump in the headline number in January, the market will be looking to see if Tokyo’s inflation continues to rise. Similarly subdued core inflation is another theme the market will be watching out for.
• The UK gets its construction PMI for Feb (expected to be unchanged at 50.5), PPI is out in Europe and the US gets the final U. of Mich. Sentiment reading for February. UK PM May also delivers her Brexit speech and BoE Carney also speaks.
• In contrast to a few months ago, the Italian election on Sunday is no longer a major concern for markets given the softening in anti-Europe stand by Five star and other major parties as well as the fact changes in the electoral system suggest the most likely outcome is that we get a coalition government.
• Germany’s Social Democrats internal vote on Sunday could potentially be more destabilising for the euro and EU markets. The party will decide if they will enter into another grand coalition with Angela Merkel’s conservatives. If the SPD referendum outcome is a yes, then Germany finally gets a new government — six months after the national election last September. If SPD members say no, then a new election is likely unless Merkel attempt the difficult task of leading a minority government.

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