The fallout from Trump’s threat of an impending tariff-geddon this Friday gathered pace overnight. Wall Street retreated sharply as expectations of a US-China trade talk stalemate increased in a somewhat delayed reaction to Sunday’s social media bombshell. Unsurprisingly, US treasury yields moved lower, and the US dollar and Japanese yen (JPY) ratcheted higher as investors rotated into safer harbours at the expense of emerging markets. On Wall Street, it was a sea of red, with the S&P 500 falling 1.65% while the Nasdaq dropped 1.96% and the Dow Jones was down 1.79%.
My theory continues to be that the global bond markets have been signalling a global slowdown for some time, but there are slowdowns, and then there are “slowdowns”. The US-China trade deal is the critical determinant of how deep or shallow the downturn will be. With global interest rates mostly at, or near, record lows except for the US, the world’s central banks are ill-placed to cut rates to stimulate growth, as they reap the harvest of their excessively easy monetary policies over the last ten years. In this context, the importance of the trade deal can be clearly noted.
If stocks were falling like birds from the sky overnight, another flightless bird from down under – the Kiwi – will have Asia’s attention initially this morning. At 10:00 Singapore time, the Reserve Bank of New Zealand (RBNZ), will in all likelihood cut rates to record lows of 1.50%, however, this has been baked into the Kiwi dollar’s (NZD) price for some time now. The real interest will lie in the statement and press conference taking place an hour later, where we will see if the cut is one and done or whether there are further cuts in the pipeline. The RBNZ’s conundrum is a familiar one to many central banks – the economy is cruising along nicely but is still faced with elusive inflation, even ten years after the global financial crisis.
China’s trade balance will also be released at 11:00 Singapore time but will in all likelihood be ignored. Asia prefers to look nervously at Wall Street’s overnight losses and that dirty two-word phrase, trade talks.
Currencies
The JPY rallied strongly against the dollar following Japan’s return from the extended Golden Week break, putting it in a club of one. USD/JPY has fallen 0.50% overnight to 110.20 with the yen’s haven credentials being well and truly put on the table. JPY typically rallies in times of stress and its strength this week is a clear warning shot of potential volatility ahead.
Elsewhere, it was business as usual with the USD bulldozing all before it as the high-yield haven currency of choice for 2019. The fall in US treasury yields overnight is clearly signalling the US bond market as the harbour of choice for investors who want to let the storms pass, and this will continue to support the greenback.
With the Australian and New Zealand Dollars hovering above key supports, emerging Asia currencies will likely feel the chill winds as well in today’s session as part of a global EM retreat.
Equities
Both Hong Kong and China managed small bounces yesterday after Monday’s heavy losses, however, this is unlikely to be the case today, given Wall Street’s heavy sell-off overnight. In all likelihood, Asia’s stock markets could be submerged in a red sea today as investors focus on global growth threats and head for the doors.
Regional stock markets are particularly vulnerable to trade-talk jitters given their high beta to trade with China. With the trade talks restarting tomorrow in Washington DC, we will need to see concrete progress and quickly in order to lift Trump’s threat of tariff-geddon at the end of the week. Until then, it’s hard to see the monsoon clouds hanging over Asia’s regional markets clearing.
Oil
Oil followed the trade-talk playbook to the letter, with both Brent Crude and WTI crumpling on global growth fears. Brent fell 2.45% to USD69.50 a barrel closing below USD70.00 support. WTI fell 1.75% to USD61.15 a barrel with the USD60.00 a barrel region next in its sights.
Following the FX and equity playbook, it’s hard to see Asia being anything but downcast on oil’s prospects and positioning itself accordingly. Black gold will remain gloomy until we get more clarity from Washington DC this week.
Gold
Gold managed an asthmatic 0.35% rally to USD1,284.50 overnight in yet another underwhelming performance that will have bulls very concerned. A safe haven, the yellow metal should be benefitting from the turmoil in global markets, but seems to be stubbornly refusing to gain a shred of upside momentum. USD1,300.00 may as well be a million miles away, and if Friday’s tariff-geddon is avoided or postponed, one cannot help but feel concern for gold’s prospects.
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