Asia Morning Session: Tariff Man Returns!

Tariff Man was back with a vengeance overnight, roiling financial markets, as President Trump re-imposed tariffs on Brazilian and Argentinian steel and aluminium. Their sin,  having economic crises that had weakened their currencies which had, in turn, allowed them to sell gargantuan amounts of agricultural products to China, thus undercutting US farmers.

The frightening lack of understanding of basic economics aside, President Trump then berated the Federal Reserve for not cutting interest rates to zero, and then threatened 100% to impose tariffs on French goods over their new digital tax. The transfer pricing of big tech via low tax regimes is a global issue, and the French tax likely reflects its frustration with the international lack of progress on this front. The French move is not without precedent, though, both Facebook and Google, for example, have agreed or are already paying taxes locally in Indonesia. Maybe don’t tell the President that.

The EU also lost another WTO hearing yesterday over illegal aid to Airbus. The EU intends to appeal, but that didn’t stop the US administration from threatening to increase tariffs on the Airbus partner countries in Europe, all of whom are also members of NATO I might add.

So yesterday wasn’t world trade’s finest hour and nor was it for the US. The ISM Manufacturing data under-performed along with all its sub-indices. The US Markit PMI though, outperformed, as it had in both Germany and most of Asia earlier in the day. It was ignored though with asset markets taking fright. A continued lack of detail on the US-China trade negotiations thrown into the volatile mix saw Wall Street fall, and FX markets rotate out of the US dollar.

In my role as the voice of reason, however, equity markets are at record high globally, with the street long to infinity and back on the FOMO trade deal, global recovery trade. The US dollar has quietly strengthened over the past month and indeed most of the year, supported by interest rate differentials and the economic data. In the greater scheme of things, the overnight pullbacks, that will inevitably flow into Asia today, remain a mere Trump flesh wound against the grander scale of the rallies.  A corrective pullback would, in fact, be healthy. It does not imply we are at the beginning of the end.

Far more concerning to the author, is the ever-increasing wave of protectionism sweeping the globe, started by the inability of either the US or China, to share the playground trade toys. If your country’s currency has weakened against the US dollar – like most of the world – and you are selling primary products to China, you to may get a tariff-burst across the bows from Washington DC for competitively devaluing your currency apparently. It appears that like it or not; the whole world has “skin in the game” in the presidential election year ahead.

Asia’s highlight today will be the Reserve Bank of Australia’s rate decision at 1130 SGT. With several cuts under its belt already this year, we expect the RBA to stay unchanged at 0.75%. The RBA must be concerned that the only noticeable impact that the cuts have had on the flagging domestic economy is an explosion in Australian housing prices. It implies that the ultra-cheap money is going to exactly where they didn’t want it to, the housing market instead of the real economy to create economic activity, jobs and some inflation. Such are the perils of a race to zero monetary policy. Although the RBA is probably waiting for visibility on US-China trade, like the rest of the globe, it will need to put its thinking cap on before easing again, lest it exacerbates distortions that create even more significant problems in the future.

Wall Street took fright at the tariff frenzy and the weak US ISM Manufacturing and Construction data overnight. The S&P 500 fell 0.85%, the Nasdaq fell 1.12%, and the Dow Jones sank 0.94%.

Asia has not been spared with regional markets a sea of red this morning. The Nikkei 225 is lower by 0.90%, the Kospi by 0.65% and the ASX 200 by 0.20%. The ASX Top 50 though has fallen by  2.00% reflecting the heavy weightings of trade-sensitive resource companies in the index.

China has also opened lower with the Shanghai Composite down 0.30% with Hong Kong 0.45% down. Hong Kong retail sales fell by a mind-boggling 26% YoY yesterday, and thus, a lot of bad news may have already been priced into the market there.

After the initial fright, Asia appears to be stabilising. Short of a positive announcement on trade, however, it is hard to see Asia recovering much of its initial sell-off today. In the overall picture, the pullback is a small correction of a robust rally.

Currency markets awoke from their slumber overnight. The weak ISM data and the tariff avalanche started by the White House induced a broad US dollar sell-off. The dollar index fell 0.45% to 97.84, and long-end US treasury yields slipped lower.

Among the majors, the Euro rallied 0.60% to 1.1080, the USD/JPY fell 0.50% to 108.95 and the USD/CHF collapsed by 0.90%, dropping 80 points from 1.0000 to 0.9915 in a clear move to haven currencies.

The Australian Dollar broke its one-month downtrend, climbing 0,85% to 0.6820, an odd move given its high correlation to world trade. Most likely, it was assisted by the expectation that the RBA will hold rates unchanged today, as well as the general weakness of the greenback. The New Zealand Dollar climber an impressive 1.25%, breaking monthly resistance at 0.6470, to finish at 0.6505.

The USD/CNH has hardly reacted to the overnight news, rising only 100 points to 7.0425 overnight. The off-shore Yuan is probably caught in no-mans-land here, with a weaker US dollar generally offsetting the CNH’s sensitivity to an apparent deterioration in the trade outlook overnight.

Against both the major and regional currencies, the US dollar is almost unchanged this morning with the main moves happening overnight. Asia will likely prefer to see if we see any more surprises from President Trump today, rather than assume a material change to the strong dollar trend is upon us.

Oil had been set for a strong rally overnight as expectations rose that OPEC+ could increase the size of production cuts at their meeting this Thursday. The rally ran into a brick wall though as President Trump announced new tariffs in Latin America and threatened new ones on Europe.

In the end Brent crude and WTI gave up their gains to finish almost unchanged, not a bad result at the end given the negativity on trade coming from the White House. Brent crude finished 0.15% higher at $61.60 a barrel and WTI finished 0.90%, or 50 cents, higher at $56.10 a barrel.

WTI’s out-performance probably reflects a protectionist element as most of its production remains within the domestic US market. This morning, both contracts have edged higher by 10 cents. The fact that crude avoided an actual down day after the Trump announcements, suggests the possibility of further OPEC+ cuts is the more supportive factor for now.

Gold recovered early initial losses to close almost unchanged, down 0.10% at $1461.70 an ounce. Gold benefited from a weaker dollar and haven flows as tariff-add-on swept markets last night.

Overall though, gold’s performance was underwhelming, managing only to recoup its intra-day losses. It implies that for gold to stage a meaningful rally, we will need to see a much larger degree of bad news hit the market than what we saw overnight.

Gold’s critical support remains at $1445.00 an ounce, with resistance at $1465.00 and then the formidable $1480.00 an ounce regions.