Today’s podcast:

https://soundcloud.com/user-291029717/trump-and-china-prepare-for-the-long-game

Overview: Masters of war

• Shanghai leads gains in global equities overnight
• China’s stimulatory measures also help commodities move higher
• Thanks to the above AUD is the G10 outperformer
• Trump administration announces $12bn aid package for famers
• Trump toughens his trade stance ahead of EU trade meeting
• Core yields stable, but longer dated JGBs are still rising
• AU CPI the focus today ahead of the Junker-Trump meeting tonight

Global equities recorded gains overnight boosted by a positive lead from Asia with the Shanghai Composite leading the way following the announcement of additional stimulatory measures from China late on Monday. US earnings results also boosted US equities, although after a solid start the tech heavy NASDAQ closed flat for the day. China’s news also boosted commodities and helped the AUD climb to the top of the G10 leader board. Core global yields had a stable night, but longer dated JGBs remain under pressure.

The improvement in risk appetite that began during our session yesterday came off the back of news late on Monday that China had unveiled a package of targeted policies to boost domestic demand intended to form a more flexible response to “external uncertainties”. This when combined with recent policy easing steps suggest China is undertaking a co-ordinated stimulus in response to trade tensions. Meanwhile, overnight the Trump administration announced an emergency-aid package of $12bn for farmers aim as an offset from China’s trade retaliation. Ahead of the farmers relief news, President Trump toughens his trade stance in a series of tweets noting that “Tariffs are the greatest! Either a country which has treated the United States unfairly on Trade negotiates a fair deal, or it gets hit with Tariffs” . Then speaking in Kansas and ahead of trade talks with Europe tonight the president said that “What the European Union is doing to us is incredible, how bad,” , “They sound nice but they’re rough.”

So although equities and risk assets in general enjoyed a good night, like Bob Dylan would sing, it seem that the masters of war are gearing up for battle. China on the one hand looks to be playing the long game, introducing stimulatory measures while also showing tolerance to CNY weakness. China’s equity markets is starting to show some stability and the negative side effects from CNY weakness are seemingly contained for now as there is no evidence of capital outflows typically associated with a currency crisis. Meanwhile president Trump is not only amping up the rhetoric, he has now also introduced offsetting measures against China’s retaliation. The threat of even larger tariffs is keeping the market weary and it doesn’t seem like anyone will be blinking any time soon.

Equities

After a positive lead from Asia (Shanghai Composite 1.61%) and Europe, the S&P 500 gave up some of its early session gains, but still managed to close the day up 0.48%. The NASDAQ made a new record high, supported by better than expected earnings from Alphabet (Google) after the bell yesterday, but it was unable to sustained the move retreating half way through the session and closing flat for the day. All major European equity indices recorded gains overnight with the DAX leading the way, up 1.12%

Currencies

USD indices are little changed after recovering following the Trump’s administration offer to help US farmers. AUD is the  outperformer in G10, +0.47%, following China’s news and a decent night for commodities. AUD now trades at 0.7424 and is still within its 0.7311-0.7484 range held since mid-June.

The CNY itself is also marginally stronger on the day, with the USD/CNY just below 6.80, although it remains near its weakest levels since June last year.

The EUR is slightly lower than this time yesterday, with the European manufacturing PMI increasing slightly while the Services equivalent showed a small fall.  The manufacturing PMI remains well below the levels reached late last year, indicative of the European economy losing some momentum, but it remains at healthy levels overall. ECB meeting tomorrow will be the focus for the euro.

Bonds

Core bond yields were reasonably stable overnight, after relatively large rises over the preceding two days.  The 10 year Treasury yield is down 1bp at 2.95%. The 10 year JGB remained at 0.075% although the 30 year JGB moved another 3bps higher to 0.798%.

Commodities

Copper and Zinc have led the gains in commodities, both up more than 2% with Aluminium and oil prices up just under 1%. Iron ore was essentially unchanged and gold was a smidgen softer, down 0.11%.

Economics

EC: Manufacturing PMI, Jul: 55.1 vs 54.7 exp.

EC: Services PMI, Jul: 54.4 vs 55.1 exp.

US: Manufacturing PMI, Jul: 55.5 vs 55.1 exp.

US: Services PMI, Jul: 56.2 vs 56.5 exp.

Coming up

• Australia’s Q2 CPI is out this morning and NAB expects the June quarter to reveal headline CPI growth of 0.5% q/q and 2.3% y/y, Bloomberg shows consensus also at 0.5%, but the dispersion of forecast ranges from 0.3% to 0.8%.NAB expects the trimmed mean inflation to print at 0.5% q/q and 1.9% y/y while the weighted median is seen at 0.4% q/q and 1.8% y/y (both at consensus).
• We don’t see Q2 inflation as significantly changing the RBA’s outlook for inflation. Rises of 0.4/0.5% q/q in the core measures of CPI are in line with the RBA’s current forecast track. While a small upside surprise would be welcome, any downside surprise would likely just keep the RBA on hold – which seems to be the Bank’s current plan as they wait for a meaningful decline in unemployment, and a lift in wages.
• New Zealand gets trade as well as residential loan data. Later in Europe the IFO survey is out in Germany and New Home sales data is release in the US.
• All that said the big event for today is the Junker-Trump (EU-US trade) meeting and it is hard to tell which way it is going to go. Earlier in the week the FT suggested Junker’s objective was for de-escalation of tensions implying no concrete outcomes are likely, meanwhile over the weekend US Treasury Secretary Steven Mnuchin sounded more hopeful that some progress could be achieved.
• US earnings report highlights: Facebook, Coca-Cola, Boeing and General Motors (any impact from trade tension, particularly from the latter two?).

Market prices

For further FX, Interest rate and Commodities information visit nab.com.au/nabfinancialmarkets