Main Themes: Markets were again focused on trade war developments, particularly given the lack of economic data. Sentiment was weighed down by China’s announcement to impose further tariffs on US goods in response to the latest round of tariff hikes on Chinese imports. Share markets and bond yields fell. The Australian dollar dropped to its lowest since the January flash-crash.
Share Markets: Weaker risk appetite on the back of Chinese trade tariffs on the US weighed on share markets. The Dow and S&P500 dropped 2.4%. It was the biggest one-day drop in the S&P500 since early January. The 3.4% fall in the Nadaq was the largest this year. The trade concerns is expected to weigh on Asian trade this morning.
Interest Rates: Risk aversion saw yields on US bonds fall. US 10-year yields fell 7 basis points to 2.40%. US 2-year yields slipped 8 basis points to 2.19%. A rate cut by the Federal Reserve is now fully priced in for December.
Foreign Exchange: The US dollar index dipped temporarily, but then ended the session marginally higher. The Japanese yen and the Swiss franc were the outperformers supported by risk aversion. The AUD fell to 69.41 US cents, its lowest since the January flash-crash, hit by the downturn in sentiment. Australian dollar has been particularly sensitive to trade-war developments over the past year.
Commodities: Prices of most commodities weakened on the deterioration in US-China trade negotiations. Oil prices were lower, despite an early bounce on reports of sabotage attacks on tankers in the Middle East potentially disrupting supplies. Gold prices were boosted by safe-haven demand.
Australia: Owner-occupier home lending (excluding refinancing) resumed its decline, falling 2.8% in March. It was the fourth drop in five months. A lift in lending over February proved to be a dead cat bounce. Loans for investor housing (excluding refinancing) declined 2.7%. Investor loans have not increased for eight consecutive months. Investors have borne the brunt of tightening measures in recent years. APRA have recently ended their cap on investor loan growth, but other measures remain in place for lending. At this stage in the housing cycle, where house prices are continuing to fall, investors are unlikely to jump back into the market any time soon. While there have been some tentative signs of improvement in the housing market such as higher auction clearance rates and an easing in price declines in Sydney and Melbourne, yesterday’s data suggests that housing demand remains weak. Negative sentiment and entrenched expectations of further declines in house prices suggest that soft conditions in the housing market is likely to persist for a while longer.
China: The Chinese government has retaliated with the latest round of US tariffs, imposing higher tariffs on a range of US imports, due to take effect June 1. The tariffs are planned to range from 5% to 25% on 5140 US products on target list of around $60 billion.
United Kingdom: The Bank of England’s Deputy Governor warned against another delay to the existing Brexit deadline of October 31, noting that investment had been “feeling the consequences of the uncertainty about Brexit and particularly the possibility of a bad outcome”.
United States: US President Trump said that he was due to meet with Chinese President Xi next month and expected their discussions would be “very fruitful”.
Federal Reserve Presidents Kashkari and Rosengren of the Minneapolis Fed and the Boston Fed, respectively, warned of the implications of the drawn-out trade war. Kashkari said that “if…. It’s ever-increasing tariffs for an extended period of time, that could change things, that could hae a real effect on US GDP growth”. Rosengren said that the US was “strong enough” but “if it starts to be a situation where we epect tariffs to be high for a long period of time, it doe start to disrupt trade patterns”.
Today’s key data and events:
NZ Net Migration Mar prev 6570 (8.45am)
AU NAB Business Conditions Apr prev 7 (11.30am)
AU NAB Business Confidence Apr prev 0 (11.30am)
UK ILO Unemployment Rate Mar exp 3.9% prev 3.9% (6.30pm)
UK Jobless Claims Change Apr prev 28.3k (6.30pm)
EZ Industrial Production Mar exp -0.3% prev -0.2% (7pm)
EZ EU ZEW Expectations May prev 4.5 (7pm)
EZ German ZEW Expectations May exp 5.0 prev 3.1 (7pm)
JN Current Account Mar prev ¥2676.8bn (9.50am)
US NFIB Small Business Optimism Apr exp 102.0 prev 101.8 (8pm)
US Import Price Index Apr exp 0.7% prev 0.6% (10.30pm)
Times are AEST. All data forecasts are m/m or q/q and seasonally adjusted unless otherwise specified. Forecasts for Australian data are our forecasts and for other countries they are consensus forecasts.
Janu Chan, Senior Economist