Attention on deficit disorder sinks stocks
Things aren’t going to plan in Trump’s tariff world with US trade data overnight showing the trade deficit blew out to a 10-year high in 2018. Whether this hardens the President’s attitude to a structural deal with the China trade talks or he chooses a quick win is hard to say, but with an election to fight next year, you can almost hear the clanking as the White House swings its heavy artillery in the direction of the other perceived trading bloc culprits.
Having dealt with the North American Free Trade Agreement (NAFTA), Washington’s sights may well turn to Japan and Europe. The US is already in preliminary trade talks with Japan – a fact lost among the China noise. The Euro-zone is the prize though, with the US running an eye-watering USD169.3 billion deficit in 2018, according to the US Census Bureau. With a slowing global economy and a potentially ugly economic hit from Brexit, the Euro-zone can ill afford a trade stand-off with Washington. And with interest rates at 0%, the European Central Bank is short of monetary policy wiggle room. One thing is for sure, long after the US-China trade deal is put to bed, we will not have heard the last of the word tariff in 2019.
In other news, the Organisation for Economic Co-operation and Development (OECD) downgraded world growth, and the Bank of Canada (BOC) released the doves instead of the hounds. The BOC held rates steady overnight but joined other central banks’ two-step line dance, U-turning on previously hawkish rhetoric.
Wall Street wilted under the barrage of news with the S&P falling 0.65%, the Dow Jones down 0.51% and the Nasdaq taking a 0.95% hit. The S&P has traced out multiple daily highs in 2019 at the five-month resistance at 2,820.00 implying that trade hopes and central bank dovishness may have run their course for now. The small-cap Russel 2000 fell by over 2% on Wall Street to 1,535.00 overnight, its biggest one-day fall in 2019. It too has tested and failed at longer-term technical resistance at 1,600.00.
Asia’s data highlight today is the Australian trade balance, which was due at 0830 Singapore time with an expected surplus of AUD 2.90 billion. Given the sell-off in Australian Dollars (AUD) following yesterday’s GDP miss, we can expect more fireworks this morning when it is released.
Globally, the highlight will undoubtedly be the European Central Bank (ECB) rate decision where we expect the ECB to hold at 0.00%. Much attention will be on the ECB President Draghi’s press conference afterwards and in particular how dovish – or not – the ECB has become.
FX
The dollar reigned supreme overnight as the waves of negative headlines sapped investor confidence leading to haven buying of the greenback. The AUD collapsed following yesterday’s poor Australian GDP number. Now sitting at 0.7030 this morning, just above support at 0.7000, traders likely have itchy-trigger fingers today. A poor trade balance reading could see support tested strongly.
The USD/CAD rose 100 points to 1.3450 overnight following the BOC’s dovish statement. With a string of other poor data, a political crisis and an impending election, it is hard to see the Canadian dollar finding too many friends in the near term. However, it’s likely the US dollar will remain firm in Asia against the regional currencies.
Equities
Regional stock markets will likely endure a tough start to the day following the dismal showing overnight by Wall Street. World growth and tariff fears are likely to be on investors’ lips and will cap rallies in stocks during the Asian session.
Gold
Gold held its important 1,280.00 support overnight, but the bounce was anaemic, being capped at 1,290.00 an ounce. For now, gold’s best hope as the dollar strengthens is safe-haven buying as investors rotate out of stocks on global uncertainty.
Oil
Much lower US official gasoline inventories cancelled out the negative news from Wall Street, leaving Brent crude and WTI almost unchanged at USD65.95 and USD56.25 respectively. The balance may adjust to the bearish side in Asia if trade worries push regional equity markets deep into the red.
