Market Overview:
World trade concerns continue to spook markets with investors worried about sentiment. Equity markets and risk related products traded steeply lower through to the close of the week with the DOW at 25,313, S & P 2,833 and the Nasdaq at 7,841.87. The US President seems to be lapping up recent trade developments saying “they are good and easy to win” Every time a country (mainly China) retaliates he returns swinging with new tariffs. There is much worse to come with Trump threatening another set of barriers which could in turn total the entire coverage off almost all US products from China. Trump end goal is to create more jobs in the US by increasing production. Decades of global trade negotiations and supply chains are at risk now. The Turkish Lira has dropped to record lows this year with it falling over 40%. Tensions between the US and Turkey are at boiling point with the detention of US pastor Andrew Brunson. The Turkish president told Turks to sell the US Dollar and buy the Lira. President Trump responded by authorising to double tariffs on steel and aluminium with aluminium now to be 20% and steel a whopping 50%. US Consumer Price Index rose in July at 0.2% with the underlying trend continuing to strengthen showing a steady increase in inflation pressures. In the 12 months to July CPI has increased 2.90%. The New Zealand Dollar was double teamed, not only has it pushed to fresh lows with rising trade tensions but was sold off heavily post the RBNZ meeting Thursday. Adrian Orr delivered a statement with a dovish tone saying the official cash rate move would not happen until well into mid 2020. The kiwi currently sits at the February 2016 low of 0.6570 with the trade weighted index at 71.35- pre cash rate announcement it was trading at 72.60. Trade talk will dominate markets this week again with data to release a little light over this week. Australian employment data and US building permits will be the highlights.
Australia
The Australian Dollar has been trading sideways against the US Dollar for some months. On Friday it broke through support of 0.7320 and posted a low of 0.7273. The RBA kept rates unchanged last week as expected but raised eyebrows with the prospects of not making a single rise for the entire 2019 year. Late 2020 will be the next rise to rates. Last week’s decision means that the rate is heading unchanged into its third year – something extraordinary in Australian history. Australian dollar investors remain fairly nervous with the ongoing trade talks between China and the US. They clearly have a vested interest in developments and their ability to export product to China. The RBA don’t seem to have a problem with a weaker Australian Dollar with currency strength hurting its ability to reach monetary goals. This week we have wage price index Wednesday along with unemployment rate Thursday. The unemployment rate is expected to remain unchanged at 5.4%
New Zealand
The New Zealand Dollar has been on the back foot since mid January this year. This is nothing new to most with it dropping from the high of 0.7435 versus the US Dollar. However last week on Thursday the fall which took it from a struggling 0.6725 to under 0.6500 was a half yearly style event with it depreciating over 1.3%. To sum things up – continuation of the bearish decline across the board for the kiwi is expected among markets and economists. Even if local data prints better than general market expectations foresee the news will be undermined by future rate hike expectations. Producer price index Friday is the only significant key data to tune into with most of this week’s movement coming in the form of “risk” trends.
United States
The mighty US Dollar has been the strongest performer over the last week against all its counterparts except the Japanese yen. The only reason the Japanese Yen has made gains is the buying interest which developed as markets turned risk averse. Heated trade developments between China and US and Friday’s drop in the Turkish Lira dragged markets lower as US sanctions were doubled. Geopolitical issues drowned out most economic releases, but US inflation reached a new high. US inflation is 2.94% which brings more weight to the question – will the Federal Reserve hike rates twice year or once as predicted? The Turkish Lira dropped over 20% last week as the Turkey President defiant, called for Turks to buy the Lira and ditch the US Dollar and gold stocks instead of trying to compete with the US on trade Tariffs. Thursday markets will await Retail Sales figures which are expected to be in line with the previous month figures around 0.4%
Europe
The Euro has dropped in value to new 2018 lows. The currency has taken out support around 1.1530 against the greenback as fears take hold of a collapse in the Turkish Lira. The currency fell 20% last week with tensions between the US and Turkey escalated with the media story of the jailed American pastor. The ECB is worried given their exposures to the Turkish Lira. Broad downside risks remain this week with the situation threatening to worsen. Watch for further Trump trade rhetoric regarding trade disputes- this will certainly keep risk investors away from any market volatility. Germany’s prelim GDP and yearly CPI print Friday.
United Kingdom
A bunch of UK related data published Friday and was surprisingly upbeat. Manufacturing Production printed at 0.4% from 0.3% expected and quarterly GDP came in at 0.4% with the economy picking up in the second quarter with both retail sales and construction assisting. Underlying growth remains modest by historical indications. The data did nothing to prevent further slides in the Pound as markets preferred the safety of the US Dollar with risks associated with the collapse of the Turkish Lira. Brexit polls have shown that over 100 constituencies that originally voted to leave the UK have turned their support to “remain”. This will have a huge impact on the parliamentary battle later in the year with most seats in GB now have a majority of voters who prefer to stay in the EU. UK (yearly) Consumer Price Index releases Wednesday and should give us further clues to growth with 2.5% expected.
Japan
Risk averse markets pushed punters into the Japanese Yen last week with the currency sliding from 111.20 to 110.20. Ongoing nervousness with trade tensions have seen the demand go back in the Yen. Equities and risk associated products are all weaker with the theme spreading into Monday’s sessions. The heated Turkey situation has increased nervous sentiment and could worsen. The Bank of Japan is still grappling with prospects of discouraging their stimulus program with the magical 2% inflation target tough. A fairly thin calendar this week sees revised industrial production and key Trade Balance. We expect the Yen to breeze past 110.00 over the week with the current global risks to much for investors to bare.
Canada
Demand for the US Dollar doesn’t look like it’s going to slow down anytime soon with the Canadian Dollar slumping to 1.3160 during early week trading. US Treasury Bills sit at over 2% making for good buying in US Dollar for long positions being the safe haven of choice. Friday’s Canadian employment numbers added an additional 54,000 jobs for July with the unemployment rate reducing to 5.8%. Speculation has increased that the RBC could hike to benchmark rate one last time for 2018. After knee jerk selling of the Canadian Dollar last week as Saudi Arabia froze all assets and investments with Canada the decision has had little follow on impact even as the Saudi Arabian foreign minister threatens more action. We only have monthly CPI to publish this week of note with most movement to be governed by trade talks and markets risk profile.
Major Announcements last week:
• NZD sink to multi year low
• Turkish Lira drops 45% in 2018 sending ripples through markets
• Risk sentiment continues to dominate price action
• RBNZ Official Cash rate unchanged at 1.75%
• RBA Official Cash rate unchanged at 1.50%
• UK Manufacturing prints up at 0.4% from 0.3% expected
• Canadian Unemployment Rate drops to 5.8% from 5.9%