Trade War Escalation

Escalated tensions between the US and China remain the dominant driver in financial markets. Risk aversion overnight was reduced as the US Commerce Department stated it would provide temporary licenses for U.S exports to Huawei. Thus reducing the negative impact of last week announced blacklist order against Huawei. This reprieve comes just hours after Google indicated it would end access to popular sites on the Android operating system. This recent move by the US is a clear signal that tensions have moved beyond a “trade war” and a highly negative development. Markets are still pricing in a positive end-result, judged by relative steadiness in equity markets. Asia shares were broadly sportive today with Shanghai up 1.23%. Yet recent aggressive actions by both the US and China to widen tariffs on each other exports have pushed out the timeline for a trade deal. Which in our view, has increased the likelihood of greater stress and possibility of failure.

The market has been blindsided by the sudden escalation and expansion between the US and China trade dispute. Equity volatility has jumped while the S&P 500 dropped 4% in early May. News flow from Washington and Beijing was a deal was imminent. China reversal on details previously agreed upon was a deep hit. Ratcheting up the tariffs on both side, in theory, adds up to $300 billion.

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AUD pursued by its old demons

The relief in AUD following the surprising reelection of PM Scottt Morrison conservative coalition for another four years was short-lived, as convictions of investors that the Reserve Bank of Australia will be cutting its Cash rate by 0.25 percentage points during its 4 June 2019 meeting is growing. The RBA policy minutes from May meeting confirmed worries over growth, the labor market and a slowdown in household consumption. Further pressure can be expected on the Aussie.

Indeed, the news is not good for both the RBA and the newly elected government as Australian treasurer Josh Frydenberg confirmed that time is running out to implement the Liberal Nation coalition election promise of a tax legislation, which is supposed to provide a tax relief for 10 million of low- and middle-income class households for 2019/20 financial years. Whether this would be implemented in 2019 and 2020 doesn’t change much for the RBA anyway, since it is highly likely that it will reduce its record low key rate to 1.25%. Furthermore, in the event of a non-applicable tax rebate for this year, we should see rising criticism against the majority government.

AUD/USD is currently trading at 0.6873, a 16-years low (-2.50% year-to-date) and approaching 0.6865 short-term.

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