Today’s podcast

https://soundcloud.com/user-291029717/president-out-trumps-himself-at-nato?in=user-291029717/sets/the-morning-call

Overview: Back to life

Back to life, back to reality, Back to the here and now, yeah

Show me how, decide what you want from me,

Tell me maybe I could be there for you – Soul II Soul

Tariff man is back baby! ….and he has also brought back a bit of market volatility, although moves in FX markets have remain relatively subdued.  President Trump has triggered a global equity sell off and a rally in core global bond yields after saying that there was no deadline for striking a deal with China and that “ In some ways I like the idea of waiting until after the election”. The USD is a tad softer with CHF and JPY benefiting from a safe haven bid while GBP also outperforms on yet another poll, this time suggesting the Tories have increased their lead ahead of the election. AUD and NZD retain most of yesterday’s gains.

Equity markets have had a bit of a reality check as President Trump pours cold water over an imminent trade deal with China. Speaking to reporters in London, the President reminded us all that “The China trade deal is dependent on one thing: Do I want to make it? . . . We’re doing very well with China right now and we can do even better. This is not the first time that the US President has suggested a China deal could be delayed after the US election, back in September he made similar remarks when our PM Morrison visited the US.  In November global equity indices posted decent gains with US indices leading the charge, printing several new record highs, as investors priced in a positive trade outcome before Christmas, also aided along by the tailwinds from this year’s three Fed rate cuts.

Overnight comments from President Trump came after US trade officials announced plans for $2.4bn worth of tariffs on French goods, in retaliation for the earlier imposition of the 3% digital tax that impacts most mega US IT companies (incl. Google, Facebook, Amazon).  USTR also says it is considering a probe on Turkey, Italy and Austria also over digital tax.  Yesterday we also reported Trump’s intentions to re-impose aluminium and steel tariffs on Argentina and Brazil, after making the spurious claim that those countries had presided over a massive devaluations of their currencies, which hurt American farmers.

While the trade mood music can change very quickly, events over the past 48 hours has forced a reassessment in terms of what to expect before the end of the year with a pullback in the probability of a US-China Phase 1 trade deal agreement before Christmas accompanied by an uptick in the possibility of new US tariffs on China imports on December 15.

So tariff man is back and he has brought market volatility back to life, at least in the equity and bond market. As we ended the month of November a lot of ink was used highlighting the recording of record or close to record low volatility readings across many markets. On November 26, the VIX index recorded a low of 11.42 and following overnight events the index printed a high of 17.99 and now trades at 16.32. US equity indices are currently down around 1% ( Dow is -1.32% while the NASDAQ and  S&P are -1%). Meanwhile in Europe the Stoxx 600 Index fell 0.6% while the FTSE 100 gave up 1.7%.

The reaction in the US treasuries market has also been significant, with the 2-year rate down 7bps to 1.5300% and the 10-year rate down 11bps to 1.7088%. The market is rightly taking the view that more tariffs are simply a tax on the US economy and therefore negative for growth, which might require some offsetting monetary policy support. The “shooting itself in the foot” theory is evident when we look at currency markets, with broad-based weakness for the USD – so no sign of the conventional risk-off support normally seen for the greenback. 

That said, in index terms the USD still remains comfortably in an uptrend. Recent activity readings from China to Germany have increased hopes that the worst in terms of global growth slowdown could be behind us. But an increase in trade tensions could jeopardise the green shoot evident in  activity readings, so the prospects of a new round of Fed easing may also come with additional  stimulus from other major central banks. The Fed of course has more room to move, but ultimately, a major decline in the USD needs the  fundamental economic case for a decisive shift out of USD assets.

Looking at G10 FX moves, true to form CHF (+0.51%,0.9862 ) and JPY(+0.40%, USD/JPY ¥108.61) sit at the top of the leader board benefiting from their safe haven attributes while GBP is also up there, +0.50% and currently trading at 1.2994. The pound briefly traded above the 1.30 mark, a level not recorded since early October, broad USD weakness has been one supporting factor and another one has been yet another poll which this time suggests the Tories have increased their lead ahead of the December 12 election. A Kantar survey put support for the Conservatives at 44% while Labour was unchanged on 32%.

Both the AUD (+0.37% @0.6841) and NZD (0.23%, @0.6516) have retained most of the gains from yesterday’s session, only showing a small pull back overnight as global equity markets headed south. Overnight  NZD traded to a fresh 3-month high of 0.6533, before the trade headlines hit the screen while the AUD traded to an overnight high of 0.687, a level not seen over the past four weeks.  Yesterday the AUD benefitted from better than expected GDP partials  and an RBA Statement ( AU cash unchanged at 0.75% as expected), which perhaps wasn’t as dovish as some were picking.

Looking at EM FX, performance against the USD has been mixed ( ZAR -0.59% BRL +0.40%, domestic economic stories the drivers), but of note too USD/CNH traded to an overnight high of 7.0870, before settling at 7.0671, on Friday the pair was at 7.02.5 In the past the AUD has shown a great deal of sensitivity to CNH/CNY weakness, but that has not been the case over the past few days.

Overnight the NZD showed little reaction to the GDT dairy auction which was softer than expected. The price index fell slightly (weighed down by butter prices), but this follows a strong improvement in pricing over recent months. Whole milk and skim milk powder prices were up 0.1% and 1.9% respectively.

EUR has been a bit of a laggard, barely rising against the weak USD. Bloomberg reports that ECB officials “face increasing pushback against their negative interest rate policy in private engagements with the region’s finance ministers”, with complaints about the detrimental impact on savings and pension systems.

Coming Up

• We have a busy calendar today with AU Q3 GDP, China Caixin Services PMI, US ADP, US ISM Non-Manufacturing and BoC policy decision.
• We upgraded our forecast for Australia’s Q3 GDP to 0.5% q/q/1.6% y/y from 0.3%/1.5%.  Such an outcome would be just shy of the RBA’s implied quarterly forecast of 0.6 to 0.7% in Q3 and in line with the consensus estimate. The revision reflects stronger public demand than NAB had forecast – adding 0.3pp to GDP against our expectation of an 0.1pp contribution – and Monday’s stronger-than-expected stocks data.
• China’s Caixin services PMI is expected to edge up one tenth to 51.2 while ahead of the US non-farm payrolls report on Friday, the ADP employment change is expected at 135k. Meanwhile the November ISM Non-Manufacturing is expected to print at a solid 54.5, two tenth lower relative to its previous month reading.
• We expect the BoC to sit on the sidelines today while also retaining a mild easing bias, largely contingent on overseas event and concerns over an anaeimic Canadian consumer.

Market Prices

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