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Markets Morning - Trade tensions back on the agenda with Canada, Europe, China, and Brexit

Market Analysis /
Greg McKenna / 03 Sep 2018

Welcome to my daily Markets Musings.

You’ll see things are different from now on. That’s because the full note was approaching 2,000 words some days and I’m breaking it up into a number of reports on the Axi Blog each day now.

That way traders can subscribe to the Axi Blog easily and then cherry pick the yarns and markets of interest 

Feedback always welcome

Greg

Market Summary (7.41am September 3 2018)

The deal with Mexico hasn’t morphed into a new NAFTA the way markets hoped last week with President Trump telling congress to butt out and back off over the weekend. There is still a chance of a deal but only on his terms it seems.

So the chance of a reduction in tensions on this front has lessened while we also know Europe is readying to hit back if President Trump imposes tariffs on cars and goes after the bloc the way the Bloomberg interview suggested last week. And then we have China, pushed into a corner and unlikely to be able to do a deal.

Mid-terms here we come.

But that didn’t bother US markets too much. It was pre-holiday weekend trade of course. So it was thin. But the S&P managed to finish the week above 2,900 for the first time at 2,901 for the tiniest gain on the day. The Dow dipped 22 to 25,964 and the Nasdaq 100 was 0.16% higher at 7,654.

But it was very different in Europe – and to a lesser extent Asia – with the DAX down 1.04%, the CAC off 1.3%, while the FTSE 100 fell 1.1%. China was lower with the Shanghai Comp, CSI300, and Hang Seng down 0.46%, 0.5%, and 0.98% which in part is why the ASX 200 was off 32 points Friday. SPI traders found 26 points of gains Friday night somehow and somewhere – we’ll see.

On forex markets the big mover was the US dollar which knocked the Euro back below 1.16 (Italy was put on negative outlook by ratings agency Fitch) and pole-axed the Aussie back below 72 cents for its lowest weekly close since mid-December 2016. They sits this morning at 1.1593 and 0.7189 respectively. GBPUSD is a little lower this morning after more revelations that Theresa May can’t give any more but the EU won’t accommodate it’s claims as they stand. GBPUSD is at 1.2920 while EURGBP is at 0.8960. The Yen continues its fairly quiet trade and sits at 111.09.

The CAD is likely to come under some pressure given President Trump’s aggressive tweet and stance over the weekend  – though it also has the Labor Day holiday today. It’s at 1.3062 in USDCAD terms. The Kiwi is at 0.6615 back toward the recent lows.

Emerging market currencies had a mild reprieve in trade Friday with the pressure released a little. But weekend comments from the IMF that money loaned and released is not to be used to prop up the Peso is likely to re-intensify that pressure on the ARS and other markets this week.

On commodity markets gold is holding $1200 in a sign that maybe traders are paying attention to a little market funk. Copper fell again and is at $2.649 in HGc1 terms. Crude pulled back a bit with WTI pushing off resistance to fall to $69.80 while the Brent price sits at $77.64. Keep an eye on Libya though folks -the fighting has intensified again. Metals and Mining shares were lower Friday.

Elsewhere US 2’s are at 2.63, the 10’s are at 2.85 and the curve is around 22 points. Bitcoin is at $7,281 as its rally holds, and strengthens.

On the day today there will be some disruption as the US and Canada are out. But we still have plenty of data to get through. Here in Australia we get retail sales for July as well as more partials for Wednesday’s Q2 GDP release with business inventories and company profits out. It’s also Markit Manufacturing PMI day across the globe and that means we’ll also get the Caixin manufacturing PMI in China. 

Macro Stuff that affects everyone and everything – either today or eventually

International

  • It looks like we may not be moving into a more accommodating period of US trade relations with its allies so it can concentrate on China after all. That’s the only takeaway I can come to after reading the press and President Trump’s tweets over the weekend. Initially President Trump raged at “off the record” comments in the Bloomy interview making their way to the Toronto Star. He’s quoted as saying off the record that he’s not making any compromises at all with Canada. He knows the pressure he putting the nations negotiators under however saying “here’s the problem. If I say no — the answer’s no. If I say no, then you’re going to put that and it’s going to be so insulting they’re not going to be able to make a deal ... I can’t kill these people”.
  • But he’s prepared to hammer Canada it seems based on his Tweets Saturday where he said, “There is no political necessity to keep Canada in the new NAFTA deal. If we don’t make a fair deal for the U.S. after decades of abuse, Canada will be out. Congress should not interfere w/ these negotiations or I will simply terminate NAFTA entirely & we will be far better off....Remember, NAFTA was one of the WORST Trade Deals ever made. The U.S. lost thousands of businesses and millions of jobs. We were far better off before NAFTA - should never have been signed. Even the Vat Tax was not accounted for. We make new deal or go back to pre-NAFTA!” Cue a USDCAD rally I reckon.
  • In other trade news it seems Brexit could be devolving into a mess. The EU keeps signalling it’s open to a trade deal, that the UK would be better with such a move. But after EU negotiator Barnier was upbeat last Wednesday igniting a rally in the Pound and collapse in EURGBP he’s walked back from that the following day and over the weekend. Initially he said EU companies should still plan for a nor deal Brexit and then he’s reported in the Guardian over the weekend as being “strongly opposed” to Prime Minister Theresa May’s Chequers trade proposals. In particular he took aim at the 186,000 people working in British car industry saying, “In order for EU carmakers to benefit from the tariff benefits of the EU-Korea agreement (pdf), only a certain proportion of the services may be provided in a car in a third country. Businesses have to be careful not to use too many parts of Britain in their vehicles in the future”. Throw in Mrs May saying there can’t be an compromise on her plan and I have one question -  has this, or is this, becoming intractable?
  • And that brings me to something that struck me when I saw a Tweet from one of the folk in my Pantheon of the platform list last week. I get that the market has trained traders and investors to ignore all the headwinds over recent years. But with the Fed tightening, quantitative easing turning to quantitative tightening, and with so many headwinds maybe we’ve just grown complacent. Which is where my tweet comes in.
Source: Twitter Screenshot
Source: Twitter Screenshot
  • And on that you know I have a view the China/US relationship has a Thucydides Trap nature about it that will play out over many years. So you might want to have a squiz at this article in the South China Morning Post (HT Richard Yetsenga ANZ chief economist) which says we should “expect ‘deep structural change’ in ties between China and US” a senior CHINESE adviser says.   
  • Regular readers know that my sense is eventually regulators will come for the big tech giants. Just think about how easy it would be to break up Facebook into FB, Insta, and WhatsApp, if anti-trust proceedings were to happen. It’s an idea popularised by NYU Stern School professor Scott Galloway. And it’s an idea that is clearly on the mind of President Trump as he battles to get his message out on the big tech platforms. He told Bloomberg last week, “as you know, many people think it is a very antitrust situation, the three of them [Google, Amazon, and Facebook],” he said adding “I won’t comment on the breaking up, of whether it’s that or Amazon or Facebook”.
  • BoJ governor Kuroda told the Yomiuri Shimbun “there is no thought about raising (rates) quite some time” he said adding, “as long as uncertainties remain, the commitment is to maintain the current low rates”. He remains hopeful that inflation will eventually rise noting, “the economy has improved and the labour market is tight. If you think according to common sense, (inflation) would reach the mid-one percent level in 2020. Barring some huge change that stops this upward move, I believe we'll reach it”.
  • And it being Monday it’s time for the CESI score (Citibank Economic Surprise Index) update. The story pretty much remains the same as we head into a big week of data. The US is underperforming still, relative to expectations and Austalia is doing best on that basis. There’ll be a lot of movement this week potentially given we have the first week of data of the month which includes retail sales and GDP here in Australia and US non-farms. Those moves are likely to be important to forex and other markets because they’ll speak to where central bank expectations will head.

Have a great day's trading.

Greg McKenna

Chief Market Strategist

gregmckenna.com.au

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