February 8, 2019

Markets Today: A way to go, for growth & a trade deal

It’s a sea of red for shares this morning. How much of this is down to Larry Kudlow’s comment that there’s a “pretty sizeable distance to go” before trade issues are resolved with China?

Today’s podcast


Overview: Long distance blues

  • Risk off tone in markets overnight
  • European and UK growth forecasts downgraded
  • White House National Economic Council Director Kudlow throws cold water on prospects of a US-China trade deal
  • Trump not meeting Xi before 25% tariffs kick in; Trump though is headed to North Vietnam on Feb 27 and 28 to meet North Korean leader Kim Jong Un; Lighthizer and Mnuchin are off to Beijing next week
  • Twitter earnings disappoint; shares down 10% after its earnings report, adding more to selling pressure
  • German Industrial production soft: a redux from weaker orders
  • Powell says US economy in a “good place”, reaffirming rates on hold message; Yellen says next move in rates could be up or down
  • Kaplan reminds listeners the US is not an island, talks of spillover risks
  • Oil back down in size; base metals less so, gold flat, but iron ore marches on towards $100/t now with a $90 handle (Chinese trading returns next week)
  • RBA Statement today but doubtful it’ll shift the market dial

It’s a sea of red in risk markets overnight, equities down in Europe and the US, the Eurostoxx 600 index down 1.49% and as we write the US main boards are all down by more than 1%, the mood damped by a combination of no near term resolution to the trade wars and economy growth forecast downgrades coming out of the EC and the Bank of England.  That  all came with comments from White House economic adviser Kudlow that there is a “sizeable distance” between the US and China over trade.

FX and growth downgrades

Against some further incremental support for the big dollar, the AUD has continued to drift lower.  The softer than expected labour market report out of NZ yesterday added a little more weight into the antipodean currencies’ saddlebags.  The NZD took the brunt of that news (supporting AUD/NZD), but it also weighed on AUD sentiment, the AUD/USD trading sub 0.71 yesterday afternoon APAC time.  This sell side weight came in the wake of the RBA’s growth downgrade on Tuesday and Governor Lowe making clear in his speech Wednesday that the RBA’s latent monetary policy bias has now become balanced, the RBA considering upside and downside scenarios for growth.

The Euro and Sterling have had whippy nights, but if we’d come in this morning knowing for sure what we do about the official growth forecast downgrades, associated EUR and GBP currency weakness would not have surprised.  Both the European Commission and the Bank of England took the knife to their outlooks, both revising down their growth outlook for this year by around ½%.   The EC cut its German, France, and Italian forecasts, the latter by 1% to a barely visible 0.2%, a repeat of last year’s 0.1% performance after their fiscal woes.  Lower Italian growth will only hamper their chances of getting to their budget target; getting there would require tighter policy.  Growth for the EC was cut by 0.6% points from 1.9% to 1.3%.

Adding some real-time force to how this slower economy is playing out, German industrial production in December disappointed expectations at -0.4%/-3.9% against the consensus forecast of 0.8%, though no one can have been too surprised given the previous day’s slide in factory orders.  The decline in production was broad-based, so cannot be attributed to the softer tone in the auto industry alone.  Trade is no doubt a big factor.

Joining the downgrade club, the BoE also took the scalpel to its growth outlook, not surprising given the wide array of Brexit uncertainty, catering to plan for the worst perhaps and hope for the best.  The UK economy is now forecast by the BoE to grow by 1.2% this year, down from the 1.7% the Bank expected last November.  At his press conference, Governor Carney spoke of how Brexit was cascading through the UK economy, rattling companies and consumers.  He also spoke of how after the “fog of Brexit” has cleared, the BoE would be looking at a rate rise in the next couple of years, though even that was scaled back from more that were expected last year.  This seemed to do the trick in producing some whippy price action in Sterling, reversing some earlier sell off.


With the market beset by a risk off tone, bonds were in demand, the German 10y down 4.7bps to 0.115% and as we go to press, the US 10y also by 4.46bps to 2.65%.  The short end also joined the bond party, 2s down a somewhat larger 4.69bps on the day.  This comes after comments yesterday in APAC time from Fed Chair Powell at a town hall meeting that the US was in a “good place” with low unemployment and inflation near target, a tone also repeated by Quarles.  Fed President Kaplan spoke overnight about time needed the clarify the outlook, speaking of one or two quarters needed.


Oil and iron ore were the big movers overnight, in opposite directions, oil down in size, WTI by 2.48% to $52.68 and Brent by 1.61% to $61.68.  Kudlow’s comments seemingly threw enough cold water on the demand outlook, adding a degree of selling force to what was an already evident drift lower in the session.  Copper prices in New York have not likewise plunged, currently off 0.3% a similar move to the LME session.  Gold was little changed and the softs were mostly weaker.

At the other end of the scale, after Vale’s production and licensing woes, iron ore prices in Asia yesterday moved higher again on their march toward $100/t, prices now north of $90/t.  The Chinese trading market returns next week, so it will be interesting to see how that market reacts.

Coming up

  • The RBA quarterly Statement today should come and go without too much market fanfare.  There are more detailed and fully-updated forecasts coming so that will no doubt provide more colour and light on the texture of the outlook, but it’d be a surprise if it had too much further impact on the AUD and local RBA pricing;
  • Japanese balance of payment/trade data, labour earnings; Fed’s Bullard speaks at 11.30 APAC time, the same time as the RBA Statement.  Now a FOMC voter, he’s been extolling the case for some time to keep rates on hold believing the economy to have already been in growth and inflation equilibrium;
  • Tonight: German trade and Canadian unemployment, the latter more sensitive for the C$, especially after Deputy Governor Lane’s comments this week also hinted at the downside, referring to the weaker Loonie helping the economy through this (softer) period.

Market prices

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