Risk Aversion Dominates as Huawei Situation Intensifies

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The Chinese-US trade war intensified on Monday as Huawei’s suppliers stopped doing business with the telco giant. The fallout could really accelerate risk off flows as China’s response is expected to be to suspend business with all suppliers who agreed to halt supplying Huawei.

European indexes are all selling off on the trade war angst and the US markets are all expected poised to open down, with the Nasdaq being hit the hardest. Safe-haven flows are driving the Japanese yen and Swiss franc higher, while gold prices struggle to breakout higher. Oil prices were supported by this weekend’s comments from Jeddah.

Five Key Stories for Monday:

Huawei/Iran – Tech stock blood bath

Oil – OPEC hints at keeping cuts

Fed Speak – Powell, Clarida and Broadbent may hint at dovish tilt

Aussie and Indian elections – Markets like election outcomes

Gold and Bitcoin – Cryptos behaving more like a safe-haven

Huawei/Iran

Risk aversion flows were the dominant theme to start the trading week as the trade war between the two largest economies saw the ripple effect on the US restrictions that were put on Huawei. The White House decision on Huawei is expected to see a Chinese response and this could drive US stocks below last week’s low. According to Bloomberg, Google, Intel, Qualcomm, Xilinx, Broadcom, and Infineon all froze supplies of critical software and components to the giant Chinese telco.

The trade war is getting uglier and even if we do see some framework agreement reached by the middle of summer, the damage will be done to global growth figures for the second quarter. All current trade talks appear to be halted and we could see continued selling until we a de-escalation with this protectionist showdown.

The other wildcard for risk aversion is the growing tensions between Iran and the US. Over the weekend, Iran fired a rocked into the heavily fortified Green Zone in Baghdad, just 0.3 miles away from the US embassy. President Trump tweeted, “If Iran wants to fight, that will be the official end of Iran. Never threaten the United States again!” Iran’s foreign minister Zarif dismissed Trump’s taunts and we should not be surprised to see Iran step down from its recent behavior. If we see continued military threats by Iran, we could see this escalate into war, something markets have not really considered to price in.

Oil

Crude prices initially rose sharply after both OPEC + indicated they want to stick to the current plan of production cuts for the rest of the year and tensions remained elevated between the US and Iran. The Saudi-led coalition discussed production levels, the Iran situation, and how much further they could drive down inventory levels. Saudi’s Al-Falih stated that Saudi Arabia will take an additional month of observing production cuts in July to observe the situation, hoping their colleagues will do the same.

The physical market remains tight, OPEC + compliance was last at 168%, but global growth demand is being dealt a blow by global trade wars and it will be hard to imagine other countries will be content with Saudi Arabia taking up all the loss oil from Iran. The path for oil is still likely higher due to supply risks from Iran, Venezuela and Libya, but we will likely see volatile moves until both the trade war is resolved and oil markets price in the risk that the OPEC + could fall apart if Russia decides to ease production cuts.

Fed Speak

Most analysts expect Fed speakers this week to stay consistent and maintain the stance that interest rates remain on hold. Recent developments however, with the trade war and global weakness, could allow the Fed to deliver a fresh dovish tilt that could allow them to catch up to the market. Fed Fund futures are currently only showing a 9.5% chance of a rate cut at the June 19th meeting and a coin flip at the September 18th meeting.

Markets will closely listen to Vice Chair Clarida’s (1:05pm ET) and Fed Chair Powell’s (7:00pm) comments today. The data dependent Fed may need to see trade talks collapse, before cutting but with the recent actions taking place with the Huawei situation, growth will be weaker globally, and the data will be much weaker in the second quarter thus warranting a cut at the end of summer.

Elections AU/IN

Morrison and Modi victories are delivering a nice boost to Australian and Indian stock markets.

The bigger surprise was from Australia. Election analysts got another election wrong, mirroring the surprise we saw with Brexit and Trump, as pollsters were calling for Morrison’s right-leaning coalition to lose for months. Australian’s chose to ignore turmoil that saw Morrison’s coalition go through three prime ministers in six years. His promise for lower energy costs, help for first-time homeowners and criticism of Labor’s initiatives and the effects on the budget appeared enough to win over voters. Tax relief is expected to be implemented early as next month. Markets are loving Australian assets today, and the A$ could have a key bottom in place if we do not see a complete catastrophic outcome from the US/China trade war.

India’s exit polls saw Prime Minister Narendra Modi’s set for a decisive victory in India’s general election. An impressive victory during a time when unemployment is off the charts and the rural sector continues to struggle. It appears, Modi will now be able to move forward on infrastructure investments, assistance for farmers and policies that appeal to Hindu nationalists. The rupee is 0.7% firmer against the dollar, but off its session highs.

Gold/Bitcoin

Gold prices are slightly firmer despite an overall risk off start to the trading week. Disinflationary conditions persist and until the Fed confirms what the markets are heavily pricing in, we could see the yellow metal struggle.

Bitcoin is up 8.5%, in early volatile trade displaying better safe-haven appeal than gold prices. The bubbly asset has had an amazing rally in recent weeks, but many are calling the recent moves similar to what we saw in 2017, before things collapsed. Momentum could see Bitcoin hit $10,000 before collapsing.

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