Global equities take a breather
After a stormy start into the week, financial markets stabilized somewhat on Tuesday morning. Asian equities closed the gap with their European and US counterparts with the Nikkei sliding 0.65% to 20,585 points and the CSI 300 tumbling 1.07% to 3,636. In Europe, most equity indices were able to take a breather, while the Footsie, IBEX and SMI continue to lose ground. The decision by the US Treasury to label China a currency manipulator had little effect on the market, as it didn’t trigger another sell-off. The lack of punitive accompanying measures could explain the lack of reaction. After such an intense weekend, investors are expecting things calm down, at least in the short-term. A stabilisation of the equity market sounds more than reasonable.
However, the longer term is more than uncertain, as there are many unresolved questions. First, does the escalation of the trade war would make the Fed more prone to cut interest rates further? Secondly, is Donald Trump ready to go “full-throttle” on the trade war? It is relatively safe to assume that President Trump could use the trade war to force the Fed to provide more liquidity. Indeed, even if it has not been the case so far the trade will have negative effects on the US economy as well as the global economy at some point. Given the fact that the Fed has already a clear dovish bias as they cut rates last week, it is just a matter of time before they trim again. The question is what would be the final outcome? Would rate cuts and a new QE be sufficient to lift equities against the backdrop of slowing economic growth and tense geopolitical situation?
AUD upward bias subdued as trade war unnerves RBA members
Constructive developments on Aussie are reversing as trade tensions intensify. Although the Reserve Bank of Australia abstained from cutting rates for a third time this year, hopes of a pause in rate cuts are subdued, as the forward guidance confirms that further easing in monetary policy is likely. Despite a rebound in June’s trade data, it appears that the outlook on the trade front is not that favorable, given that Australia’s four main trading partners are in trade war mode, a situation that is expected to directly affect the Australian economy in the future.
As stated by RBA Governor Philip Lowe, investors can expect further expansionary monetary policy in order to support labor and inflation as consumption and wage growth should slowdown in Q3. Forecasts even indicate a decline in RBA’s Cash Rate as early as October 2019. Trade data from June printed an impressive surplus of AUD 8 billion (prior: AUD 5.745 billion), an historical high, due to abnormal contribution from non-rural goods (i.e. iron ore and coal). Yet the trend is likely to turn as the recent trade standoff and escalation of tit-for-tat actions of both Japan and South Korea will weigh on Australia’s exports. On a side note, South Korean Ministry is expected to announce details of additional sanctions against Japan this week. Despite the recent rebound in AUD, we expect the increase to be limited, as a decline in RBA Cash Rate is expected at the turning point considering current market settings.
Currently trading at 0.6788, AUD/USD is heading along 0.6770 short-term.
