Trump shocks markets by upping tariffs

Fresh Trump-tariffs shock markets

The indefatigably impetuous US President Donald Trump stunned financial markets overnight, announcing a fresh round of US tariffs on the Chinese economy. If the Fed was the left jab to the market on Thursday, then the US President’s decision to escalate the trade-war last night was the right cross to its jaw. The Bank of England news, as well as all other data releases, have been washed out by the trade-news. Stocks have sold off in rapid fashion on Wall Street, in a day of high volume and low market breadth. Safe havens have leapt higher, with US Treasury yields tumbling – the yield on the benchmark 10 Year US Treasury note, for one, plummeted 14 basis points, to a new low around 1.96%.

Safe havens prosper as growth concerns build

Defensive stocks did catch a small bid during the US session, while the Yen spiked with gold – the yellow metal is up over 2%, as the pool of negative yield debt in global markets swells once more. The USD is down according to the Dollar Index, but has traded mixed across the G10 currency space, as investors rush to balance safety and relative-yield concerns. The AUD, the growth proxy that it is, is preparing to re-introduce itself with the 0.67 cent level. And oil prices fell off a cliff, falling over 6%, as market participants instinctively price in a future whereby new US tariffs cripple global economic growth.

Where is this all heading?

Psychoanalysing US President Trump is wrong and ultimately futile, but the question has to be – what’s his end game here? Love or loathe Trump, a strategic ends to this trade-war, and how it furthers his Presidency, is ambiguous at best, completely thoughtless at the worst. There’s no doubt China needs to perform better as a global economic citizen. But Trump is a populist and has shown no appetite for internationalism – instead, he’s bent on an isolationist, nationalist, “America-First” agenda. And perhaps those ideas have merit, for some. However, these tariffs have tangibly hurt the US economy and American, and could precipitate a US recession. That’s surely not in the US’s best interests.

It can’t end well

Need evidence? US ISM Manufacturing data was printed overnight. It’s the best mainstream indicator the market possesses to get a read on future US economic growth. The correlation is stark, and has more or less accurately tracked the ebbs and flows of the US business cycle since its inception. And it’s probably what the Fed is looking at when it speaks of “downside risks” to the US economy. That data-point missed again overnight, printing at a 51.2 reading, against expectations of 52.0, betraying an accelerating slowdown in US business activity. More to the point: it peaked in August last year – a month after the first-round of Trump-tariffs. More tariffs can only exacerbate this unfolding dynamic. Again: this is surely not in the US’s, or President Trump’s, best interests.

And in local news

The Australian stock market proved reasonably resilient in the face of yesterday’s post-US Fed market backlash. The ASX 200 did sell-off all-in-all, however the intensity behind the selling was far less than what had been experienced on Wall Street the night prior. The weaker AUD, pushed lower by a raging USD, certainly softened the blow to the markets, as traders take-profit off the table after what was a very momentum driven rally earlier in the week. Within the market itself, the Real Estate Sector outperformed yesterday, after CoreLogic released data showing that Australian house prices climbed again last month. While Rio Tinto reported after hours, and broadly beat expectations.

Aussie day ahead

Australian investors and traders turn their attention to local Retail Sales data this morning. Expectations are for a slight lift in consumer activity last month, with month-on-month sales forecast to have grown by 0.3% in June – up from 0.1% in the month of May. Aside from international trade disruptions and a slow-down in the global economy, sluggish domestic consumption has been highlighted by the RBA as a key downside risk to Australia’s economic outlook. Leading into the RBA’s meeting next week, today’s Retail Sales print will be closely watched by market participants, to get a better feel on when the RBA ought to cut rates next.

The week in markets doesn’t slowdown here

The major event on the global economic calendar will undoubtedly be US Non-Farm Payrolls data, tonight. The US economy is forecast to have added 165k jobs last month – a level of jobs growth sufficient enough to push the unemployment rate back to a 50 year low at 3.6%. Crucially, wage growth is forecast to have remained steady at 3.1% last month, betraying an economy still lacking demand-pull inflation. Better than expected numbers could inspire the most action in markets tonight, as traders continue to adjust for the Fed’s less dovish than expected outlook for US rates.