Market Overview:
Markets saw last week out on a positive note as the June US Non-Farm Payrolls figure came in ahead of estimates at 213K with an upward revision of May data to 244K. The Unemployment Rate was modestly higher due to an increase in the participation rate, up from the 3.8% level previous, to 4%.
There was little negative market reaction on Friday to the news that the US introduced tariffs on $34bn of Chinese goods, or that China had immediately retaliated by imposing a similar 25% tariff on 545 US products – also worth a total of $34bn. Global equity markets along with risk-linked currencies actually pushed higher on the announcement, another example of sell the rumour buy the fact.
This week brings more political events with US President on a trip to Europe meeting with other European leaders at the NATO summit at towards the end of the week and then a meeting with Russian president Putin on Sunday….given past events over Trump’s discussions at last month’s G-7, markets are bracing for further volatility. There was more positive news around Brexit over the weekend with UK PM May, gaining cabinet support for a pro-business plan which includes a free trade area for industrial and agricultural goods, based on a “common rule book” and a “combined customs territory” saw the UK pound gap higher on the open yesterday.
Also this week are several central bank speeches which may be helpful pointers for future direction, BOJ Governor Kuroda, ECB President Draghi and BOE Governor Carney all address an audience at some point this week. The Bank of Canada will hand down their rate decision on Thursday; and the ECB release their monetary policy minutes. New Zealand and Australian markets opened the week on a more positive note with both currencies higher on a softer US dollar and taking advantage of a higher appetite for risk.
Australia
Also slow week for Aussie data this week, June business confidence is out later today which is expected to show a mild uptick…..While US-China trade tensions remain the market focus over coming weeks, risks remain to the downside for the Australian dollar. However, Australia’s key commodity prices have been broadly resilient; especially LNG and thermal coal, suggesting AUD downside should be contained multi-month.
The Australian Dollar (AUD) enjoyed a lift overnight as the US Dollar continues to maintain a softening stance across the broader markets as bulls take a breather, while the AUD is experiencing a bolstering from rising copper prices, which are lifting from recent bottoms as the Greenback recedes.
New Zealand
A quiet data week for the kiwi, with only the relatively minor Manufacturing Index data due on Friday which is not expected to have any market impact. As expected Finance Minister Robertson downplayed last week’s poor NZ business confidence survey , NZIR Quarterly data showed a sharp drop in confidence from -11 to -20, he noted that there is more to the economy than one survey can show…While this may be true, there is no doubt that the economy is softening off and with the potential trade war unsettling trading nations , of which New Zealand is one….We look for further weakness in the New Zealand dollar with any rallies providing selling opportunities.
United States
The first shot was fired in the US-China trade war, without much kick-back from investors, this calm may be short lived ! For months, financial markets have been bracing for US President Trump to follow through with threats of tariffs against China. So it came as little surprise when the US implemented duties on $US34 billion ($46 billion) in Chinese imports on Friday, as planned, and Beijing retaliated proportionately. The Trump administration is currently reviewing another round of tariffs on $US16 billion in Chinese goods. If the US stops at duties on $US50 billion in imports, and China does likewise, the hit to both countries’ economies should remain relatively modest. If both countries then saw sense and financial markets bent but did not break a gradual wind back to normality may be possible. However, Trump said last week that he may expand tariffs to more than $US500 billion in Chinese goods, to basically cover all imports from the Asian nation into the US, that would be a huge escalation the impact of which is very hard to quantify…a sharp decline in US financial markets and corresponding knock-on to world equity markets could be one such effect allied to falling wealth and a hit to US growth of around 0.4% for the year. The risk is that businesses start to reactive in a negative way by postponing investment decisions and already there is some anecdotal evidence of some US operations putting capital expenditure plans on ice. The great danger is that in a more severe scenario, declining business investment with lower consumer spending would decrease demand, potentially prompting other countries to lash out in retaliation with more trade barriers , creating a vicious cycle of mounting protectionism and slowing growth. US CPI data on Thursday night, is likely to be the biggest release of the week given the soft US wage figures seen last Friday.
Europe
The train crash that is Brexit continues to roll along the rickety track….The more positive news UK PM Theresa May had gained cabinet support for a pro-business plan which includes a free trade area for industrial and agricultural goods, based on a “common rule book” and a “combined customs territory” saw the UK pound gap higher on Monday morning.
However this was tempered by news that UK Minister David Davis has resigned from his position as Brexit Secretary following the UK cabinet’s agreement to PM May’s new Brexit proposal, with hard-line Brexiteers including Davis angry over the agreement, claiming that the new proposals betray the original referendum result…Overnight came the shock news of Foreign Minister Boris Johnson’s resignation, which has thrown May’s Brexit plans into disarray as she struggles to retain leadership of her party and prevent her government from imploding….look for continuing crises to dog the May government.
The UK pound sterling heads into the new week with any bullish momentum now knocked away, and Sterling traders will be wary of upcoming challenges to Prime Minister May’s leadership from hard-liners within the UK’s Tory party.
UK GDP out tonight will be one to watch, considering expectations that the BOE will look to hike rates in August.
United Kingdom
European markets were higher to start the week, building on last week’s more positive services sector expansion for June as the industry drove a pick-up in the Eurozone’s growth momentum….On the data front, there were some minor releases, with the ones coming from the Union mostly positive, as Germany’s Trade Balance posted a surplus of €20.3B, surpassing April’s figure and market’s expectations of €20.0B. The EU July Sentix Investors’ Confidence index surprised to the upside, printing 12.1 from the previous 9.3, also beating market’s expectations of 8.2…..Later tonight the ZEW survey on German and EU’s economic sentiment for July will be out and is expected to show a continued deterioration in business confidence….this may place the support level of EUR/USD 1.1720 under threat…Trade fears continue to overshadow the EUR/USD trading pair.
Japan
Yesterday BoJ Governor Kuroda gave a low key speech where he said that he expected the economy to continue to expand at a moderate pace pushing towards the BoJ’s inflation targets. Japan’s consumer inflation is currently moving between 0.5% and 1.0% and the BoJ intends to continue to control the yield curve for as long as needed until inflation hits their 2% target….The central bank will adjust its monetary policy as needed to maintain economic momentum.
Canada
With the tariff trigger being pulled on China/US trade last Friday, attention is on the serious trade tensions between the U.S and Canada. Canadian officials will be anxiously watching these developments as a full-blown trade war would be disastrous for the Canadian economy, which is heavily reliant on exports. If trade tensions continue to worsen, look for the Canadian economy to face challenges and the Canadian dollar to face strong headwinds.
On Friday, Canada’s job growth surprised to the upside in June at 32k, though a softer pace of wage growth and higher unemployment rate took some gloss off the headline print, while the international trade deficit was wider than expected in May at -$2.8bn on stronger imports.
Overall, the data will be seen as mixed, with BoC officials more focused on wage growth than headline unemployment and continuing solid import data provides a tailwind for investment…with GDP growth for Q2 tracking around 2.4% which is a low bar for the BoC to hike rates at it meeting on Wednesday.
Major Announcements last week:
- 7 July tariffs start for 36B worth of China Products
- Boris Johnson resigns, GBP falls away
- UK Manufacturing prints at 1% up from -1.4% expected
- German Economic Sentiment takes a hit releasing down on predictions