Markets and commodities capitulate under trade tensions

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March 25, 2018 12:33:24

A trader from BGC, a global brokerage company in London's Canary Wharf financial centre
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Another tough day at the office on the markets, with prospect for many more as volatility returns to global markets. (Reuters: Russell Boyce)

It doesn’t take much to spark a rush to the exits in equity markets these days as Wall Street traders sold up and left the market wallowing in correction territory again.

Traders had hardly settled after their early February wage-inflation panic attack, when the notion of a global trade war sent them scampering to the bunkers, stuffing as much profit in their pockets as they could before the weekend arrived.

The Dow shed more than 1,000 points, or around 4 per cent, in the two sessions since President Donald Trump stepped up his campaign against Chinese imports.

Markets on Friday’s close:

  • ASX SPI 200 futures -0.9pc at 5,743 ASX 200 (Friday’s close) -2pc at 5,820
  • AUD: 77.0 US cents, 62.3 euro cents, 54.4 British pence, 80.6 Japanese yen, $NZ1.06
  • US: Dow Jones -1.8pc at 23,533 SP500 -2.1pc at 2,588 NASDAQ -2.4pc at 6,993
  • Europe: FTSE -0.4pc at 6,922 DAX -1.8pc at 11,886 Euro Stoxx50 -1.5pc at 3,298
  • Commodities: Brent oil +2.2pc at $US70.45/barrel, Gold +1.4pc at $US1347/ounce, Iron ore (Steel Home) -1pc at $US66.50

But is it war?


It is upping the ante in a high stakes game, but what are the implications of President Trump targeting hi-tech Chinese imports?

The blue-chip index is now down more than 10 per cent since its recent peak on January 26.

The broader SP500 dropped more than 2 per cent on Friday and it could have been worse.

A tad more would have seen the index breach its 200-day moving average — a level where a lot of “technical” chart-based trading hits the sell button.

The prospect of breaking through that “technical resistance” is very much a possibility early this week.

The ASX took its marching/running orders from the US dropping 2 per cent on Friday. Futures trading points to another sell-off to start the week.

For those looking for a positive spin on things, the fall on Wall Street from its record high has been far more severe than the 4 per cent retreat by the ASX.

But it was not just the fears of a trade war erupting with China.

The replacement of H.R. McMaster with John Bolton as National Security Advisor was seen as a pivot to an even less accommodating foreign policy stance, and thus a less market friendly stance from White House.

The fears of a US government shut down did not help either.

The shut down was averted late in the day by a none-too-impressed President signing Congress’ newly passed $US1.3 trillion spending bill.

“But I say to Congress I will never sign another bill like this again, I’m not going to do it again,” Mr Trump warned.

At least Mr Trump can console himself that his administration is solvent and there was no need to go through the “you’re fired” schtick on a mass scale.

Despite the market receiving a decent heads-up on the new trade sanctions, and the fact that not only are the details a bit sketchy, but the immediate impact on both the US and Chinese economies are negligible, fear still is the dominant emotion.

FANGed

Facebook Apple Netflix Google apps on an iPhone screen
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FANGed: The big tech stocks Facebook, Apple, Netflix and Google’s parent Alphabet lead the rout on the Nasdaq index. (ABC News: Charlotte Letts)

Tech stocks also took a pounding for an entirely different reason.

Facebook’s seemingly cavalier approach to users’ personal data saw its value drop by a lazy $US50 billion in a two-day, 9 per cent selling spree.

The entire FANG cohort, including Amazon, Netflix and Google followed suit, taking Microsoft along for the ride as the market started to question their lofty valuations.

Not surprisingly, the VIX (aka the fear index) surged well above its long-term average. That points to a fairly rough month ahead.

Perhaps an even more accurate tracker of the state of US equity markets than a rising VIX is a plummeting tweet count from the presidential @realDonaldTrump account.

Mr Trump cheered on the market in the first 12 months of his presidency, often either taking credit for its ever upward trajectory, or bemoaning the lack of credit he had received for it.

However, the Wall Street tweets have pretty well dried up since the February correction.

“For a person who’s been obsessed with stock market gains since his election victory 16 months ago, Trump doesn’t appear too concerned about the impact his tariffs are having at the moment,” Craig Erlam, a market analyst Wall Street broker OANDA, wrote in a note to clients.

A graphic showing the frequency of tweets from US President Donald Trump about the stock market compared to the SP500
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President Trump’s pro-Wall Street tweets, signified by blue dots on the SP500 chart, have dried up as the market has tumbled.

Trade tensions hitting miners

The mounting trade tensions are being felt acutely among China’s big commodity traders and steel producers, and by extension Australia’s miners and steel makers.

“The prospects of trade war between US and China has driven a systematic selloff in commodities,” Zhou Tao, an analyst with Citic Futures in Shanghai told Reuters.

“The market is in panic.”

The most actively traded steel contract on the Shanghai futures market was shut down on Friday after hitting its downward limit of a 7 per cent fall for the day.

The Dalian Exchange’s key iron ore contract also hit its downward limit on Friday, completing a fourth consecutive week of losses.

The prices of most Chinese steel and iron ore futures contracts have now fallen back to levels last seen in mid-2017.

Australian miners are very much collateral damage in the trade spat.

BHP, Rio Tinto and Fortescue all lost 3-to-4 per cent on Friday.

Coking coal miner, Whitehaven, was down more.

Interestingly, Bluescope Steel, which had been exempted from the punitive US steel tariffs, fared worst of all — down almost 7 per cent.

In a trade war an exemption does not equate to immunity. There would be few winners.

Oil bubbles up

Pump taps cover with oil in the Midway Sunset oilfield, California
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Oil prices rose by more than 6 per cent last week, the largest weekly gain since June 2017. (Reuters)

While metals and bulk commodities are falling, oil is heading the other way.

The key global benchmark, Brent Crude, pushed above $US70/barrel as the OPEC and Russian alliance said it would maintain production cuts into 2019 to help support prices.

The appointment of John Bolton, a man known for his hard-line stance against Iran, as National Security Advisor didn’t harm sentiment either.

The equation is simple. The reintroduction of trade sanctions against Iran means less oil sloshing around on global markets.

Data dries up

On the data front it is pretty quiet week, both locally and offshore.

Private sector credit is about as interesting as it gets from the ABS, which isn’t saying much.

Offshore, PCE inflation (a favourite of the Fed) is the highlight.

Australia

Overseas

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money-and-monetary-policy,

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