Week in Review
Global equities continued their ascent last week, steadfastly refusing to be concerned by the apparent ratcheting up in “trade war” frictions between the United States and China. Bond yields also rose, with US 10-year bond yields now comfortably above 3%. All up, markets are taking the current round of trade blows as “not as bad as feared”, with the US announcing last week it would levy only a 10% tariff (rather than a once threatened 25%) on a further $US200 billion of Chinese imports, and China retaliating with a proposal to levy a tariff of 5-10% on $US60 billion of US imports. Both measures are due to come into force this week.
On the negative side, there seems no end in sight to the current tensions, with Trump threatening to lift this week’s tariffs to 25% by early next year if China does not agree to a deal. A further negative is the fact that it’s not exactly clear what the US wants, as it has a shopping list of desires ranging from a lower trade deficit with China to vague pledges that China respect America’s intellectual property rights. On the positive side, China I suspect is seeking to deescalate tensions to the extent it can without a humiliating loss of face. It seems to be battening down the hatches to endure the new tariffs (the lesser of two evils compared to far ranging trade reforms?) and potentially call Trump’s bluff to escalate tensions a lot higher.
Of course, this is not an ideal scenario, but bull markets are never short of worries. Another silver lining, at least, is that the trade war is not really global, but now largely confined to the US and China (which are, admittedly, the world’s two biggest economies!). As a share of the global economy at least, the cumulative increase in tariffs on both sides remains small beer and should not alone derail the ongoing global economic expansion too much.
In other notable news, oil prices pushed higher last week and further gains seem likely given capacity constraints suggest OPEC won’t be able to fully make up for the looming shortfall in global supply as sanctions start to cut into Iranian exports. See my recent note on this here.
As noted above, America and China’s latest trade measures go into effect this week, but as this is now known it should not cause much of a ripple in global markets. Instead, the main focus will be the US Fed meeting, which is virtually guaranteed to produce the third rate hike this year. Of particular interest will be whether the Fed’s interest rate projections (i.e. the “dot points”) suggest more or less hawkish intent for the coming year. Given ongoing strength in the US economy and recent firm inflation reports, I suspect the median Fed expectation – for a further rate hike in December and three more hikes in 2019 – will remain in place. This should continue to underpin $US strength and cap any further upside in the $A.
Otherwise, it will be another relatively data light week both globally and in Australia. Locally, credit growth on Friday should affirm continued slowing in housing demand. A more concerning negative event risk for the financial sector, in particular, will be the Royal Commission’s interim report due to handed down by week’s end. It will obviously provide a blistering critique of the sector, and its suggested regulatory changes are unlikely to be business friendly.
Have a Great Week!