Markets Morning - Trump's new tariffs turn prices after the US close

Market Analysis /
Greg McKenna / 11 Jul 2018

Welcome to my daily Markets Musings

Aapologies for the lateness the trade war news meant I had to rewrite quite a bit of today’s report.

Feedback always welcome


Market Summary (8.46 am Wednesday, July 11)

With nothing fresh to scare them and the prospect of solid earnings in the US, stocks were higher again overnight as the recovery from trade war fears continues in both China and the US. The rest of the globe is just along for the ride.

So at the close the S&P 500 was 0.35% higher at 2,794 – that’s looks to me like its highest close since February 1, before the Volocalypse. I guess if all the messiness of 2018 can’t knock stocks lower then why shouldn’t traders focus on the upside? Interesting candle though.  

Anyway, the Dow was 143 points higher at 24,919 for a 0.58% gain while the Nasdaq 100 rose just 0.1% to 7,282. In Europe the positivity from Chinese and Asian moves saw trade start in a good mood and by the close the DAX had added 0.53%, the CAC 0.67%, but the FTSE lagged with just a 0.05% gain even after monthly GDP wasn’t terrible (0.3% May) though industrial production (0.8%) undershot expectations.

Since the close though news has broken that the US is readying its $200 billion list of goods for China in this trade battle and as a result US futures are down as a result from 2,796 earlier to 2,775 now. STILL TOO SANGUINE I reckon.  

Here at home after the ASX200 neatly reversed of Fibo resistance yesterday to close at 6,258 futures traders have still lifted the SPI even after the news above and the reaction in US futures, USDJPY, and the Aussie dollar. So where as around 6.30 am the SPI was up 21 points, 0.33%, now it’s still up 16 points or 0.258%.

One day someone will care about the trade war. One day. .

The positivity in stocks taken together with the NFIB business optimism survey, and the quit rate in the JOLTS helped the 2 year Treasury rate rise a little to 2.586% while the 10’s also lifted to 2.869%. The rounded curve has now fallen to 28 points. That’s starting to get serious – see full note for why

On forex markets the news has shaken up what was an otherwise quiet day for forex markets. Whereas the Yen was 0.4% weaker an hour ago it is now down 0.2% flat on the day at 110.85. Euro hasn’t reacted to the news and is at 1.1731  even though the ZEW sentiment in Germany printed an ugly -24.7 from -16.1 last month. GBPUSD is at 1.3254 after trading a Brexit and data induced range of 1.3225 to 1.3300. So the Sterling bulls are still winning.

The commodity bloc was fairly quiet until the news with the AUDUSD at 0.7469 an hour or two ago. It’s now back at 0.7423 below the overnight low. The CAD recovered early loses as well as traders wait for the BoC tonight – USDCAD is at 1.3119 while the Kiwi is at 0.6821.

To commodities and oil is higher despite US Secretary of State Mike Pompeo suggesting the US may grant some nations exemptions over the Iran oil sanctions. Strikes in Norway and other supply disruptions along with concern about the Iran sanctions impact are tending to focus traders minds on the topside right now. As a result Brent climbed 0.95% to $78.81 and WTI was 0.5% higher to $74.21. API crude data showed a big draw.

Copper was a little lower losing 0.6% to $2.82 despite Chinese PPI and CPI printing stronger yesterday. Gold is 0.2% lower at $1255 after another long tailed night. This time it was the downside traders tested with XAUUSD trading a low of $1247.

Bitcoin has lost around 5% to $6,373 – did you see my new Crypto Weekly video yesterday?

On the day today we get the Westpac Consumer Sentiment Index along with home loan data here in Australia. Japan releases PPI and Machinery orders and then the main events are tonight in North America with the release of US PPI and the Bank of Canada decision on interest rates.

Have a great day.      

Here's What I Picked Up (with a little more detail and a few charts)


  • If anyone is surprised that the US is actually looking to hit China harder on trade you haven’t been paying attention. Not attention to me and my bleating that this would get worse first before it gets better. Rather you haven’t been paying attention to this Administration and its drive to remake America’s relationship with everyone it feels is taking advantage of the United States. Just this morning President Trump again belted Europe about its lack of Defence Spending and then tied it to the EU’s trade surplus with the US. So it should be no surprise, especially given comments China is influencing North Korea, that the US is going to continue its battle over trade. No surprise at all.
  • Anyway, the news is that $200 billion worth of goods are going to be hit with a tariff of 10%. Let’s see what China says today, lets see what markets in Asia do. There is a fair chance it’s nothing right now, not till they are released that is. But this escalation won’t go unanswered. And on that front, Bridgewater’s Ray Dalio explained his tweet I mentioned yesterday about the “First day of the war with China” a little better in a Facebook post. He apologised for sounding alarmist and framed it in a 1930’s style conflict. Not good, still alarming.
  • Looking at stocks then it’s worth noting that in my original introduction, written before news broke on the $200 billion in tariffs, I said the candle on the daily S&P 500 looked interesting. It was a signal to me that perhaps last night’s trade was a potential peak. Now, when I look at the reaction to the news on futures that may be the case. Certainly, it reinforces the range top.


Click on me, I'll expand
Click on me, I'll expand


  • US PPI is a big data release tonight. The market is expecting  0.5% headline and 0.3% core which would take the respective yoy rates to 3.2% and 2.6%. Both would be the highest in years but it’s tomorrow night’s CPI and the ability of firms to pass on price rises which is probably more important. That said though PPI will be important in informing – at least in the next 24 hours – expectations about what the Fed will do in the months ahead. Will it really hike twice? Or just the once.
  • Yesterday’s Chinese PPI may give a hint. After the rate of growth of producer prices dipped earlier this year yesterday’s print of 4.7% yoy for May was a sharp acceleration from the previous month’s 4.1% and higher than the 4.5% forecast. That, along with the lift to 1.9% in Chinese CPI yoy for May suggests that China is again acting as an inflationary force – even a mild one – for the global economy.  
  • There has been much chat about the flattening of the yield curve and what it means. It’s all doom and gloom of course. We’ll all be ruined and so on. But how flat the curve gets is instructive to the chances of a recession – based on historical modelling – according to Piper Jaffray analysts.  I saw this chart in the Wall Street Journal’s excellent Daily Shot blog last night and then tweeted it.
Source: Twitter Screenshot
Source: Twitter Screenshot


  • Yesterday’s NAB business survey as better than I could have hoped. I tweeted yesterday after looking at the “@NAB Biz survey looks good for business still though Employment sub-index interesting”. But I’d add what Alan Oster, NAB chief economists said, which was the employment sub index is still consistent with around 20,000 jobs being created each month.
Source: NAB
Source: NAB
  • The ASX200 reversed almost perfectly off the Fibo target yesterday. It was a big day of weakness and even though the SPI traders overnight are betting we have a better day again today I’m not convinced. Not just because of the trade news but because copper was lower, big global miners were under pressure, and because of the technical setup. First target is 6,207 then 6,146 while the high holds.
Click on me, I'll expand
Click on me, I'll expand
  • The Australian dollar was up around the 0.7471 region before the trade news broke. At 0.7430 now it is below the overnight low and looking wobbly.0.7415 is the target now and support as the 38.2% retracement level of the recent upmove. Fundamentally if this trade war does actually escalate in the way that $200 billion in additional tariffs suggests it might then the Aussie, and the AUDJPY, is one of the most liquid proxies available to short the global economy, emerging markets, and commodity prices – all of which are likely to come under pressure from an escalation. That most forecasters are calling the Aussie lower already will only add to the downdraft if things kick off. A break of 0.7393 would be a sign the downtrend has resumed.


  • There is one really interesting thing about the price action in forex markets this morning after the Bloomberg story on the additional $200 billion in tariffs.  That interesting thing is that the USD did not weaken against the Euro. It did weaken against the Yen. But you’d expect that, the Yen is a natural safe haven in times of trouble – or at least an accepted one. At 110.80 USDJPY is 45 points below where it was at 111.25 around 6.30 am this morning. That’s still not a big move though all things considered. I guess because while US futures are tentatively lower we have to see if the tariffs are actually announced and what the Chinese say and do in response. Equally we have to see what Chinese markets do in response.
  • No doubt there will be suggestions the USD should weaken because a trade war will hurt US growth. But the reality to me is that the US economy stands in a better place right now than other nations. Take the ZEW survey released last night against the NFIB survey or the quit rate in JOLTS. The divergence I keep talking about in the respective economies is real and it will inform different and divergent responses from the Fed and other central banks. That still matters to Forex traders.
  • Anyway the chart of today I’m going to use is USDJPY weekly. Last night’s high at 111.35 is a good place for a high technically as it’s not far below the 3 year weekly downtrend line.
Click on me, I'll expand
Click on me, I'll expand

Have a great day's trading.

Greg McKenna

Chief Market Strategist

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