Below trend growth to continue
There wasn’t a strong response to the news that peace talks between the US and North Korea have broken down.
Geopolitics is well and truly back with President Trump announcing overnight that the proposed June 12 Summit in Singapore he was to have with North Korean leader Kim Jong Un is off. Initial thoughts ran to Trump’s recent comments speaking aloud about the possibilities on whether the meeting may or may not occur and that even if this one didn’t occur, it might occur later. Trump comments overnight sounded more decisive/final though he did say later that a meeting could occur later, but if North Korea does the right things, setting the bar higher.
“The world…has lost a great opportunity,” President Trump said, citing “anger and open hostility” in a recent North Korean statement. “Please let this letter serve to represent that the Singapore summit, for the good of both parties, but to the detriment of the world, will not take place,” he wrote in a letter to Kim. Speaking later at the White House, Trump said his “maximum pressure campaign” against North Korea would continue and threatened a military response if Kim resumes nuclear activity. On the surface, it’s sounding pretty strong stuff. But he also left the door open for the talks to take place if Kim takes “constructive” steps toward peace. “It’s possible that the existing summit could take place, or a summit at some later date.”
Adding some more spice into the geopolitics mix on the trade tensions front, the President warned that he might impose car tariffs of 25% on all car imports, ostensibly on national security grounds. German Chancellor said that she is expecting a lasting exemption from US steel tariffs and there’s no doubt that Trump’s comments on car tariffs will not have been lost on her either.
Market reaction overall has so far been measured and somewhat contained. Currencies have struggled to find new direction, the VIX is little changed and US stocks closed down, the Dow by 0.3%, the S&P by 0.2%, while the Nasdaq was little changed. The Japanese Yen initially jagged lower to below 109, but has since been bid back above the figure. The BBDXY spot dollar index has been overall drifting a little lower, the AUD/USD trading this morning in recently familiar territory at 0.7578. On some signs of a safe haven bid from investors, the gold price rose, up $15.20/oz to $1,310, a rise of 1.17%, US bonds also getting support, 10 year bond yields down a net 1.65bps to 2.977%. (There was no key US data to move markets.) European bond yields eased too, the 10 year German bund yield down 3.5bps to below 0.5% at 0.472%. Base metals rose on the LME.
Oil had a down day for once. Russia’s Energy Minister Novak said that Russia and OPEC will discuss whether it’s appropriate to scale back production cut, sufficient news for investors to take some money off the table from oil after what’s been a very good run. The Brent-WTI spread widened further on US oil supply pipeline congestion concerns with the EIA reporting a 5.78m barrel rise in US inventories last week as US production continues at a brisk rate.
Sterling found some support after UK retail sales were much stronger than expected in April, bouncing back after the “beast from the east” storm depressed sales in March. Yesterday the Times ran an article suggesting that UK PM May was planning to ask the EU for a second transition period to run until 2023 to avoid a hard border in Ireland. The government has since denied any truth to that report. May’s Brexit war cabinet remains split on the two options for the UK’s future trading relationship with the EU. EUR is also a little stronger against the USD. Interestingly, Mark Carney spoke overnight that a very positive deal (progress in Brexit negotiations towards a “deep and special” relationship with the EU were his words) could unleash an investment boom. That’s an out there view, having spoken earlier in the week about how Brexit had sliced off 2% from the UK’s growth. He also spoke of the importance of BoE guidance through the Brexit uncertainty.
There were two Fed speakers overnight, Kaplan and Harker, both non-voters this year and neither especially rocking the boat as far as whether the Fed will hike three of four times this year and some more next. Harker had a slight dovish tilt suggesting that he doesn’t want to push rates above neutral and that his view remains three (maybe four) this year and another three next taking Fed funds to neutral then. Kaplan said that he doesn’t want inflation to run persistently above or below 2% and that it’s not historical symmetry with no need for catch up for inflation undershooting. He’s prepared to tolerate some overshooting, but only if it’s seen as temporary.
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