Trade war whiplash and other market themes for the week ahead

The question of who's suffering most from a trade war has no straight answers. Many reckon no one wins (Published on August 5, 2019)

US-China Trade war

It's been a familiar pattern in the Sino-US trade war since 2018. Combative tweets from Donald Trump, high-level talks between the two sides, a stalemate, more tariffs and counter-tariffs, and then conciliatory messages. 

Last week, it was Trump's turn for a surprise move, raising the stakes in this real-world poker game. 

China then swiftly said it will have to take countermeasures, and on Monday, China let the yuan breach the key 7-per-dollar level for the first time in more than a decade, a sign Beijing might be willing to tolerate more currency weakness that could further inflame a trade conflict with the United States. 

(Photograph:AFP)

Many reckon no one wins

Chinese seed and food company shares and rare-earth firms are rising as they anticipate Beijing won't buy more from the United States. The US shoe, apparel and consumer goods manufacturers are groaning about potential input price rises, demand hits and damage to their supply chains.

The question of who are suffering most from a trade war has no straight answers. Many reckon no one wins. The Fed's interest rate cut may help ease the manufacturing pain in the United States, but the dollar surged against the yuan since then and will offset that for US companies. 

China has done a lot more targeted fiscal and monetary easing, can more easily source US imports from elsewhere and also can inflict pain on US commodity and farm sectors that back a Trump presidency.

Trade data due out from China on Thursday is likely to reinforce a trend of declining exports and imports, the latter also a function of slowing investment and demand at home. 

Its trade surplus with the US has been rising too. Growth may be at its weakest pace in 27 years, but foreign investor inflows into China suggest there is no hand wringing yet. 

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Bond Bonanza

Investors can't get enough of US Treasuries these days and that's good news for the upcoming auction of $84 billion of new debt. The US Treasury Department is looking to sell $38 billion of 3-year notes, $27 billion of 10-year notes and $19 billion of 30-year bonds between August 6 and August 8.

Appetite seems insatiable for US Treasuries after the US Federal Reserve's first interest rate cut in more than a decade and President Trump's move on Thursday to extend tariffs to essentially all Chinese imports, escalating a trade conflict that is now poised to further hit US consumers and businesses.

And with Trump and Congress has struck a deal on a two-year extension of the debt limit in July, another obstacle is out of the way. 

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Latest Trump tariff curveball

Trump's tariff curveball to the Fed saw markets immediately price in chances that policymakers may have to cut rates more aggressively. US 10-year Treasury yields touched 1.832% in the wake of Trump's tariff move. 

The massive drop in benchmark yields marked their lowest level since November 9, 2016 - the day after Trump's surprise presidential win. Thirty-year yields hit 2.368%, the lowest since October 2016. 

Raising a red flag of recession ahead, the inverted US Treasury yield curve between three months and 10 years has fallen deeper into negative territory since the latest Trump tariff threat - falling to close to the 12-year lows of minus 26 basis points set earlier this year.  

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Follow the Fed?

The central banks of Norway, New Zealand, Australia, India, Philippines and Thailand all hold interest rate meetings in days to come and hot on the heels of the first cut in US rates in over a decade, the action is almost guaranteed.

Some will be looking to follow suit. New Zealand is expected to trim another 25 basis points off its 1.50 per cent main rate and there are outside bets that Australia could even make it three cuts in a row, having already dropped borrowing costs down to 1 per cent.

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Growth slows in India

India is expected to make its fourth cut of the year too as growth continues to slow there and while Thailand is not expected to move the strength of the baht is causing worries again.

Then there is the outlier Norway. The issue here is whether or not it sets up a September rate hike. It has been flirting with the idea for months but it might decide that now might not be the best time to do it. If that's the case it will have to massage its message accordingly. 

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A tale of two economies

It will be busy in Europe this week with a blitz of data ranging from updated eurozone July services PMIs and HSBC results on Monday, German industrial orders, output on Tuesday and Wednesday and ThyssenKrupp and Adidas results on Thursday that should show how European consumer and industrial wallets have been holding up. 

It comes after two top German firms offered a snapshot of the euro zone's flagging economy this week: Industrial heavyweight Siemens joined a chorus warning of weaker demand for automotive parts and other products, highlighting how the region's manufacturing recession is sending shivers through the corporate heartland. 

The warnings came as data showed eurozone manufacturing contracted at its steepest rate since late 2012 in July as China's slowdown and escalating global trade tension bite. 

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Downturn prove worse than feared

Friday sees the release of June gross domestic product data. 

Economists predict a 0.1 per cent growth rate month-on-month and 1.2 per cent on a year earlier, down from 1.5 per cent in May. Industrial output is forecast to have shrunk, as is manufacturing.

Some expect the economy may have shrunk in the second quarter, while the BoE on Thursday slashed its growth forecasts for this year and next.

The pound's fortunes remain at the mercy of Brexit uncertainty, but should the economy's downturn prove worse than feared, expect more losses for the British currency. 

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Not so sterling

The plunge in the British pound in recent days delivered investors a dose of what might happen should the market's worst fears about Brexit - a disorderly, disruptive break from the European Union in October - come to pass.

Sterling skidded to a 30-month low against the dollar, below $1.21 and down 2.2 per cent in less than a week, as fund managers, industry executives and Bank of England Governor Mark Carney all lined up to warn about the hit to the economy of a no-deal Brexit under new Prime Minister Boris Johnson.

The week should provide some insight into how the economy is holding up amid the political uncertainty: On Monday, the Purchasing Managers' Index for Britain's all-important services sector is published for July, with a Reuters poll forecasting a reading of 50.2, barely above the line of 50 that separates growth from contraction.

Text Source: Reuters

(Photograph:Reuters)