Markets are taking a fairly sanguine view of the trade war between China and the US and that allowed stocks and bond rates to rise again last night amid a general feeling of relief that there weren't more headlines and the Chinese hadn't fought back by devaluing the Yuan or doing something else as overtly aggressive as that might be.
But I sense in some of the individual cross-market moves that below the surface investors and traders are positioning for a protracted battle that does ultimately impact asset pricing via the economic growth channel.
Take the outperformance of the Nasdaq 100 or the Russell 2000 versus the S&P 500 or the DAX, CAC, or FTSE. What we see here is investors favoring markets they see as immune - or at least inoculated - from the trade war.
Global tech giants above the fray and smaller companies below the waves and exposed to a still booming US economy.
Equally the continued slide of the Aussie, Kiwi, and CAD along with the collapse of copper in the past week, and the continued underperformance of metals and mining shares to the total global stock market highlight that there are genuine concerns about the outlook for growth.
That's a theme central bankers talking in Sintra at the ECB conference concentrated on last night.
As I wrote in MArkets Morning earlier, Fed chair Jerome Powell said overnight, “changes in trade policy could cause us to have to question the outlook… For the first time, we’re hearing about decisions to postpone investment, postpone hiring”. Mario Draghi was a bit worried as well. “It’s not yet time, in a sense, to see what the consequences on monetary policy of all this can be,. There’s no ground to be optimistic on that,” Draghi said. :S
And as I've been highlighting recently China's economy is slowing sharply with the CESI now around -50 from around +50 a month ago. And things are only going to get worse if this chart I picked up via @TeddyVallee's Twitter feed is any indication.
Money drives growth via the borrowing and investment channel. And when money velocity slows then there is a strong chance that investment is also slowing sharply and thus growth will too.
That's something that RBA governor Lowe highlighted at Sintra last night when he highlighted why he won't cut rates - but equally why Australian growth and inflation won't be lifting anytime soon. Lowe said, "to try to get back to 2.5 (the middle of the RBA’s inflation band) very quickly , it would be mainly through people borrowing more money, and having higher asset process – I think that’s a much bigger risk to our economy than people having surprisingly low inflation expectations".
That just highlight's the policy divergence that Austraian central bank boss Ewald nowotny said last night was driving the Euro lower. It's also driving the Aussie and other commodity currencies lower as well as pressure emerging markets.
It all means the perfect storm I suggested was brewing for the Aussie dollar over the horizon is still building. Against this backdrop the Aussie dollar will continue to be offered.
To the charts now and the Aussie has had a lower high again over the past 6 or so days. So, with the price now back down around 0.7370 it seems to me that the low from a couple of days ago is likely to be tested again. If that level – mid 0.7340’s – then its back below 72 cents for the Aussie.
Resistance is at 74 cents then 0.7425.
Have a great day's trading.
Chief Market Strategist
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US equities continue to welcome any high-risk event being put in the rear-view mirror – especially when rates markets look prime to consolidate lower