Markets Today: EU votes, Tories squabble, Trump golfs

Markets calmed a great deal on Friday.

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Today’s podcast

Overview: Damaged goods

  • US Durable goods orders (downward revisions) play with the grain of Thursday’s soft PMI data
  • Trump’s suggestion trade deal still possible, incl. Huawei, boosts risk sentiment offshore on Friday
  • US dollar loses altitude, supporting AUD, NZD as well as EUR, GBP; latter despite the end of May
  • Quiet start to week (US, UK holidays); AU Capex, China PMIs among the week’s highlights

In what one major newswire described as a ‘free-wheeling’ press conference on the White House lawn, President Donald Trump on Friday said that Huawei, the Chinese telecommunications network company, was “very dangerous” but could still be “included” in a trade deal with Beijing; this as the President announced a $16bn bailout package for farmers hit by escalating tariffs. Mr Trump said there remained a “good possibility” that the negotiations with Beijing could get back on track and that he would met with Chinese President Xi at the Osaka G20 summit.

Trump’s remarks resonated more strongly in offshore markets than they did locally on Friday, providing a modicum of support for risk sentiment that had suffered earlier in the week on rising pessimism regarding prospects for some form of détente on trade by the time of the end-June G20 Summit. The S&P 500 gained 0.14% on Friday. In the meantime, we await news of likely China’s retaliation to the U.S. decision to lift the tariff rate on goods currently subject to tariffs from 10% to 25% from June 1, what happens once the 90-day reprieve for US firms dealing with Huawei ends, and of course now the threat of imposing 25% tariffs on all Chinese imports. This could include greater restrictions and red tape on US firms operating in China, possible consumer boycotts of US brands, such as Apple, export restrictions of rare earth materials used in high tech electronics and, of course, the potential for China to allow the CNY to depreciate.

Also somewhat ominous on the trade front, early in our morning on Friday the U.S. Commerce Department said it was proposing a rule to impose countervailing duties on countries that undervalue their currency relative to the dollar. “This change puts foreign exporters on notice that the Department of Commerce can countervail currency subsidies that harm U.S. industries,” Commerce Secretary Wilbur Ross said in a statement.  “Foreign nations would no longer be able to use currency policies to the disadvantage of American workers and businesses,” he added.

This development potentially lowers the bar to the US naming other countries as currency manipulators, currently the purview of the (less political) US Treasury. Six  countries are currently on the Treasury’s watch list as meeting some but not all of the criteria to be deemed currency manipulators (largely but not entirely because of the size of their bilateral trade surpluses with the US). These are China, Japan, S.Korea, India, Germany and Switzerland. In the meantime, there has been nothing but bonhomie between President Trump, currently in Japan, and Japan prime Minister Abe. The trade rhetoric sound all warm and fuzzy, but there is no expectation a comprehensive trade deal will be struck anytime soon.

The key economic news offshore on Friday and which initially hurt the US dollar and US equities and added to the downward pressure on US Treasury yields was US April durable goods orders.  The headline figure of -2.1% wasn’t far off the -2.0% expected, nor too the 0.0% outcome ex-transportation (0.1% expected). But core capital goods orders (i.e., ex-defence equipment and aircraft) fell by 0.9% (-0.3% expected) plus there were some hefty downward revisions to the prior three months’ worth of data, totalling 1.8% for headline orders and 1.1% ex-transport.  Together with last Thursday’s soft Markit PMI data, evidence that the manufacturing side of the US economy is suffering from the trade dispute is mounting. This in turn is underpinning expectations the Fed will be cutting rates in H2 2019, money markets still ascribing a slightly better than even chance of a rate cut by the September meeting and about one and half cuts by year-end.  US Treasury yields were virtually unchanged on Friday, 10s recovering from their post-durable goods orders dip to close flat at 2.32%.

The US dollar lost ground after the Markit PMIs on Thursday and did so again after durable goods orders on Friday, the DXY index 0.25% lower to 97.60, so now 0.75% back from its new post-May 2017 cycle high of 98.35 last Thursday prior to the PMI data.  This in turn means that the EUR. GBP, AUD and NZD were all higher on Friday, NZD by 0.5% and the AUD by 0.4% to 0.6927 (0.9% up on its pre-election and last week’s low of 0.0.6965).  Gains have slightly extended in early day trade Monday, AUD to 0.6932 as I write.

GBP rallied Friday notwithstanding PM May’s announcement she was stepping down from June 10th (following President Trump’s visit to the UK) whereupon the leadership race to succeed her formally kicks off. Though a candidate favouring hard/no-deal Brexit will almost certainly succeed May, we still regard all options as on the table (from an October 31st hard Brexit through to a second referendum and or general election.  Earlier Front-runner Boris Johnson has just been out saying that “no one sensible would aim exclusively for a no-deal outcome…but no-one would take no-deal off the table:”

Finally, incoming results from the EU elections look to be having a very mild positive impact on the EUR (and too GBP).  Nigel Farage’s Brexit party looks like to have won the most UK seats (mostly at the expense of the Tories) but doesn’t look to have fared even better than expected. And while in France, where Marine Le Pen’s looks to have won more seats than President Macron’s En Marche, it’s possible the centre right and centre left blocs will still retain a majority in the overall EU parliament, though this isn’t yet confirmed.

Coming up

  • Locally the Q1 capex survey on Thursday – the second of the GDP partials after last week’s construction work done – is the main economic event. NAB expects overall capex lifted 1% in Q1 (mkt: 0.5%), with a 1.3% lift in equipment investment, which is the component that feeds into GDP. Building approvals (also Thursday) and credit data (Friday) are likely to point to the ongoing deterioration in the housing market. NAB forecasts approvals fell 5% in April (mkt: flat) with monthly credit growth slowing to 0.2% (mkt: 0.3%).
  • Thursday’s NZ Budget is likely to continue to report a robust fiscal path of growing cash surpluses. Wednesday’s RBNZ Financial Stability Report promises to be interesting in the context of the bank capital proposals, with a press conference and testimony to Parliament the same day. Wednesday’s ANZ business survey should capture the government’s 17 April announcement that it was ditching its capital gains plans.
  • China official manufacturing and non-manufacturing PMIs are due on Friday, where the market is expecting a slight deterioration on both measures. The manufacturing PMI is expected to stay at around 50 pts after deteriorating (like many other global PMIs) late last year.
  • US core PCE inflation (Friday) has of late continued to print below the Fed’s target at 1.6% y/y and there is little sign of a rebound. There is only one scheduled Fed speaker this week (Clarida on Thursday). Revised Q1 GDP is due Thursday.
  • The Bank of Canada meets on Wednesday and economists unanimously expect rates to hold at 1.75%. March GDP is due on Friday and there is a speech from BoC’s Wilkins Thursday.

Market prices

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