One could write a book on events and headlines since our last daily on Friday, after yesterday’s local public holiday. The bottom line is that downward pressure remains on global equity markets, global rates and the USD.
A multitude of events and headlines have been hitting markets over the last couple of trading sessions. Trade wars have ratcheted up, large US tech stocks are under fire from regulators, key global economic activity indicators have been softer than expected, analysts have been cutting rate projections and earnings forecasts as economic risks step up a gear, while expectations of Fed easing policy have intensified.
Things began to turn pear-shaped after trade wars took on a new higher dimension after the US brought Mexico and India into the mix on Friday. Trump threatened to impose tariffs on all Mexican goods (about $350bn) entering the US if the Mexican government fails to take aggressive measures to stem the flow of immigrants through Mexico and into the US. The proposed tariff rate would start at 5% from 10 June and rise to 25% by October. The Mexican government is sending a delegation to Washington on Wednesday to discuss migration and the tariff threat. Analysts noted that US tariffs on Mexican imports would trigger a bigger hit to US growth than the tariffs imposed on Chinese imports, given the quantum and integration of supply chains.
Also on Friday, the US administration announced its intention to end the India’s special trade treatment. As of 5 June, India will no longer be regarded as a developing country, effectively cancelling the tariff exemption for Indian products worth billions of dollars. This comes after the US dissatisfaction with India’s lack of provision for reasonable and equitable access to its markets.
Over the weekend, China confirmed its plans to setup a list of "unreliable " foreign companies that could be hurting “the legitimate rights and interests" of Chinese companies. FedEX is top of the list with China announcing the company is under investigation because it seemingly violated Chinese laws and regulations by misdirecting packages. US-China trade relations are getting worse by the day, with reports that Chinese students at elite US schools will be next in the firing line.
As if intensifying trade wars weren’t enough to worry about, technology stocks headed south after a report that the Federal Trade Commission had secured rights to begin a potential antitrust investigation into Facebook. This followed Friday’s news that the US Dept of Justice was preparing to scrutinise the potentially anti-competitive behaviour of Google’s parent company Alphabet. Other large tech stocks fell in sympathy with concerns that behemoths like Amazon might also face similar probes. Reuters reported that the Justice Dept had also been given jurisdiction to probe Apple.
Weaker global activity data haven’t helped sentiment, with China PMI indicators remaining underwhelming and last night’s US ISM manufacturing figure unexpectedly falling to its lowest level since October 2016, although within the mix, new orders and employment readings rose slightly. With trade wars taking on a new dimension, analysts at US investment banks are ratcheting up recession risks – cutting growth forecasts and warning of growing risks to equity markets.
Expectations of the US Fed easing monetary policy are growing by the day. The Fed’s uber-dove St Louis President Bullard said that a rate cut “may be warranted soon to help re-centre inflation and inflation expectations at target and also to provide some insurance in case of a sharper-than-expected slowdown”. Looking at the Fed Funds curve, four full rate cuts are now priced through to the end of next year, with at least two cuts and half a chance of a third cut priced for this year. The US 2-year rate is down 7bps to 1.85% taking its fall over the past week to over 30bps. The 10-year rate is down 4bps to 2.08%, after falling to as low as 2.07% last night, its lowest level since September 2017. Germany’s 10-year rate fell to a record low of minus 0.22%, before ending the session little changed at minus 0.20%.
Growing expectations of rate cuts have softened the blow for US equities from all the bad news noted above, with the S&P500 “only” down 0.4% at present, although the tech-heavy Nasdaq index is currently down 1.7%.
In currency markets, with the US economy having the most to lose from its trade wars against a growing list of countries and growing expectations of the Fed slashing rates, the USD is the biggest loser. The widely followed DXY index is down 0.5%, taking its two-day loss to almost 1%. The NZD is the best performing of the majors, up 1%, just shy of the 0.66 mark. So this isn’t your typical risk-off event. The USD has been one of the most overbought currencies – over-valued against all and sundry on our long-term purchasing power parity models, and with net speculative positioning being very long. Some position squaring will be helping the likes of the NZD. The AUD is up 0.6% to 0.6975.
The heavily-shorted EUR is also outperforming, up 0.7% to 1.1250. USD/JPY found some support just above 108, albeit is still down to its lowest level since January.
Global growth concerns remain forefront of mind for the oil market, with prices extending recent falls. Brent crude is down 2%% to below USD61, taking its losses over the past few days to around 13%.
In the day ahead, the RBA is widely expected to cut rates by 25bps to 1.25%, the beginning of what is expected to be a series of rate cuts, after having maintained a steady policy rate for almost a full three years. More interest might lie in Governor Lowe’s speech in Sydney tonight for clues on how deep rate cuts might go. The risks are weighted towards a small fall in pricing at tonight’s GDT dairy auction. NZ rates fell across the board on Friday, probing fresh lows in cases, and today the market will be playing catch-up to falls in global rates seen since the last local close.
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