Welcome to your delusion

Prepared by Jeff Halley, Senior Market Analyst

Welcome to your delusion

That’s certainly the feeling I had as Wall Street closed higher on Friday night. Financial markets are stubbornly refusing to reprice themselves to reflect the dangers of a populist world-trade agenda, led by the US as they hiked tariffs on USD200 billion of Chinese goods to 25% on Friday. Instead, the markets appear to be choosing hope disguised as optimism and refusing to believe the global bull market can end. Rallying on any crumbs of trade talk progress by the US President and his representatives, and burying their heads in the sand when the impending reality of a trade-war slowdown – as evidenced by the bond market all year – slaps them in the face.

The worst miscreants, of course, are the equity and oil markets, Equities, in particular, remain not too far off record highs and seem to be focusing on a possible Trump-Xi meeting at the upcoming G-20 meeting as a magical panacea to break the deadlock in each respective side’s trade positions. The announcement that the US is “preparing the paperwork” for 25% tariffs on an additional USD325 billion of Chinese goods, or that China has stated it would prepare retaliatory measures, has been almost ignored due to the possibility of a handshake between the two world leaders. The saying goes that the market can remain irrational longer then you can stay solvent, and that certainly seems to be the case for now. A good dose of reality, should it ever bite on equity and energy markets, could be bitter medicine indeed.

On that theme, Wall Street enjoyed a positive Friday even though the much heralded Uber initial public offering (IPO) found surge pricing elusive, falling below its offer price on the first day of trading. The S&P rose 0.38%, the Nasdaq was up 0.08% and the Dow Jones jumped 0.45%. Bonds, gold and the dollar held steady, refusing to play the hope-versus-reality game championed by equities, although oil took the bait, with both contracts rising slightly on Friday.

US-China trade relations will continue centre stage this week with most other data and events relegated to a distant second place. China will no doubt announce retaliatory measures while the US may provide more concrete start dates for the newly-imposed tariffs. Markets can expect short-term whipsaw price action as the street hangs on every little comment emanating from Washington DC and Beijing. The data calendar has a mid-month look about it, with mostly tier-two releases backloaded to the second half of the week. Highlights will be Westpac Australian Consumer Confidence and China Retail Sales and Industrial Production on Wednesday, along with US Retail Sales.

Currencies

The dollar index finished almost flat on Friday with the Japanese yen continuing to outperform. Asian markets may well tentatively dip their toes in the water and unwind some of the last week’s losses, as a quiet weekend on the Twitter front and a positive finish by Wall Street encourage the unwinding of long dollar positions.

That sentiment is very fragile however, and traders should be prepared for a rapid retreat back into dollars on any negative trade headlines.

Equities

China markets, unsurprisingly, were on the frontline of President Trump’s tariff bombshells last week. With Wall Street closing in the green and much being made of a possible meeting between the two leaders at the upcoming G20. As such, China and by default the rest of Asia will likely start on a positive note. The lack of drama over the weekend has given Asia the chance to ignore reality, munch in the same way as Wall Street.

As with currencies, the recovery may be fragile though and will be vulnerable to headline bombs appearing on the news wires or social media.

Oil

Spot prices in both Brent and WTI enjoyed a gently positive day on Friday with choppy intra-day trading. Brent Crude rose 0.70% to USD71.10 a barrel and WTI rose to 0.30% to USD61.30 a barrel. Over the past week, both contracts appear to be tracing out consolidative patterns of their longer-term gains. This is tempered by the amount of geopolitical optimism built into the prices of both contracts at these levels. A sudden dose of trade-war reality could see a rapid repricing of oil lower.

Gold

Gold closed almost flat at USD1,285.00 an ounce on Friday, supported by safe-haven flows ahead of the weekend with gains offset by a strong dollar. The net effect is the yellow metal continues to be marooned in the USD1,280.00-1,290.00 an ounce regions, lacking the momentum to break out, one way or the other. Unfortunately, the situation is unlikely to change this week either.

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