Sell the rumour

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Global markets remained cautious for much of last week ahead of the Trump Administration’s Friday deadline to impose a 25% tariff on $US34 billion worth of select Chinese imports. The tariffs duly went into effect and China, as promised, vowed speedy retaliation – without specifying specific measures as yet. As it turned out, however, global stocks then rallied! It was a classic case of “sell the rumour, buy the fact”, with investors seemingly still confident a deal will be reached before the trade war gets much more serious.

Indeed, it should be noted that even if Trump completes his threat to impose tariffs on $50 billion worth of Chinese imports, that still only constitutes 0.3% of America’s $US18,000 billion economy. The 25% tax on these imports constitutes 0.075% of GDP. Of course, if Trump goes all the way and imposes a 25% tariff on the $500 billion of total Chinese imports (3% of US GDP), the tax impact would be a more noticeable 0.75% of GDP – which would be felt through either reduced incomes and/or higher costs and prices. It’s also likely Wall Street’s reaction will be much less benign if Trump ever decided to make good on these extra threats.

Meanwhile, what helped Wall Street look the other way on Friday was another “goldilocks” US employment report. Jobs growth was solid and rising labour force participation meant the perilously low unemployment rate actually ticked up a little, to 4% from 3.8%. Most importantly, average hourly earnings growth remained benign, with annual growth steady at 2.7%. As it stands, the US economy is on track to record bumper annualised Q2 GDP growth of up to 5%, from 2% in Q1. Last week’s Fed minutes also suggested America’s central bank still remains upbeat on the economy and, notwithstanding obvious trade risks, seems on track to lift rates again in September, and most likely December also.

At this stage it is Chinese financial markets that have reacted most negatively to the trade wars, with the currency and stocks under downward pressure. Trade jitters have also helped weaken the iron-ore price, and its broad uptrend since early 2016 looks under increasing threat.

In Australia, we had mixed data last week with a surprisingly solid retail sales report yet further weakness in home building approvals and house prices. That said, some of the strength in retail spending appear to reflect earlier than usual winter Department store sales, and it still seems unlikely (to me at least) that spending will remain solid in the months ahead given soft household incomes and weakening house prices. Despite all this, local stocks continued their impressive run, with the S&P/ASX 200 up 1.3% last week.

Week Ahead

There’s little key data globally this week, with the US CPI on Thursday the highlight. Although the core annual CPI rate is expected to tick up a little further (from 2.2% to 2.3%), the market will naturally be sensitive to a much higher than expected result given the ongoing strength in the economy and the Fed’s tightening cycle. More generally, markets are likely to remain focused on any further escalation (or hopefully deescalation) of the trade wars. By week’s end, America’s Q2 earnings reporting season also kick’s off, with reports from leading banks such as JP Morgan and Citibank. Although this quarter’s earnings reports are likely to remain solid, some of the investor joy could be tempered should CEO’s issue trade-war related concerns about the outlook.

Locally, we’ll get updates on the NAB business conditions index and Westpac consumer sentiment index on Tuesday and Wednesday respectively.

Have a Great Week!

BY David Bassanese | 9 July 2018


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