Morning note: Equities pressured on tough talk on China trade, RBA holds
US equity markets pared losses yesterday, with the S&P 500 declining by around half a percent to 2,932.47, having been close to the 2900 handle again.
Rhetoric from the US side
has shifted markedly in the last two days. Having seen progress and a good
direction to productive discussions, relations have soured.
Tweets from Donald Trump
over the weekend saying he would raise tariffs on $200bn in imports from China
as early as Friday did the main damage to risk sentiment, sparking a selloff in
equities. Following this the Robert Lighthizer and Steve Mnuchin said China had reneged on its
commitments and painted a very downbeat picture of the talks. This hit trade
sensitive stocks after-market and will keep the downwards pressure on equities.
Quite where this leaves us is hard to say. There is a sense that the US is working extremely hard to extract last-minute concessions from China ahead of a planned visit by vice-premier Liu He. That visit has been confirmed – he is to visit the US May 9th-10th. Equity futures in Europe rose on the news of the Chinese visit still being a go, but risks remain skewed to the downside today it would seem.
Just talking tough?
Will that be enough to avert the tariffs being raised on
Friday is unclear, but at least it means the two sides are continuing to talk
and a deal is still possible. However, we don’t know if this is a last-ditch
rescue mission to save talks or something that moves talks on in a more
substantive way. The optics suggest the former, but one cannot but sense that
Mr Trump is playing us a little. He may well be making a deal seem further away
in order to make the achievement seem all the more impressive
when it comes.
The market has been juiced by expectations the US and China would do a deal, combined with a much more dovish sounding Fed. Those two key planks are what the ATHs rest upon – remove one and we should expect more downside.
RBA holds rates before Australian elections
Elsewhere, in the FX space, the RBA chose not to cut rates,
leaving the benchmark at 1.5% again. It was about 50/50 whether the central
bank would cut or stick, and it seems that for now, with enough evidence that
the slowdown can be blamed on transitory factors, the RBA is prepared to wait
and see before easing. Also, with the election looming, the RBA probably felt
it wise to wait.
We’ve seen global central banks pivot from their tightening
stance, but markets have just been a tad quick in calling the new easing cycle
– the Fed last week and the RBA today confirm that it’s a done
deal. AUDUSD spiked to regain the 70 handle – it may well now
keep in a range between 0.7030 and 0.7060, the narrow band it was in for the
last week of April.
GBPUSD remains supported above 1.31 but remains susceptible
to Brexit news flow again. Despite all the jawboning, there is little evidence
that Labour and the Tories can do a deal. Whether this gaping chasm between the
major parties forces the UK towards a second referendum, General Election or a
hard exit is still unknown.
Finally, a word on Bitcoin – the crypto market remains bullish and Bitcoin futures are moving rapidly towards the $6,000 level. This could attract some technical interest as it would mark the clear move out of the bottom formation, whilst momentum traders may start to pile in on the back of it.