Today, the Trump Administration grabbed the trade bull by its horns and neatly dispatched the victim. Not a good day for the trade bull. For others such as NUCOR, it was a brilliant day as tariffs were imposed on China to the tune of about US$60 bio. The imposition of tariffs does have a number of sectors worrying, especially those in the farming sector in the Midwest. So not a good day for them.
The Chinese have suggested that they may impose tariffs on live hogs, soya beans and a number of products in a manner that hurts Trump’s voting base. China in response has threatened agricultural as well as machinery makers such as Caterpillar and aircraft manufacturers such as Boeing. Farm incomes are at their lowest levels since 2003. Hence, an aggressive stance by China could seriously hurt the farm sector in the U.S.
The imposition of tariffs includes Chinese investment and purchases in the U.S. The U.S. has long complained about the barriers imposed to trade in China including technology transfers, an inability to purchase businesses such as banks, and insurance companies.
What comes out of this is anyone’s guess, but the strategy is designed to make trade fairer and open up Chinese markets without losing intellectual capital or transferring technology.
For the steel mills this is a short-term gain. However, they will need to now invest in capex as offshore producers will look to cut costs and research more efficient means to boost production. The problem is that tariffs usually work to the detriment of those imposing the tariff.
The imposition of tariffs will commence after a 60-day consultation period during which some 1,300 products will be reviewed with a chance of watering down tariffs.
For markets though, it was a day of good for some and not so for others. For equity traders, it was a risk off day so not so good. The equity markets are now being weighed down by the technology stocks following the debacle at Facebook. The Security chiefs at both Facebook and Twitter are leaving or have left. That raises more questions as to just what happened during the U.S. elections.
During the week, Facebook has fallen some 2.7%. However, its star has been significantly tarnished. The exiting of John Dowd from Trump’s defense team countering Mueller’s Russia probe also dented enthusiasm in equity markets. The pick up in volatility for others was a welcome signal. So, for some it was a good day.
The bond traders had a great day today, if you were long. The day was very much a risk off day. Bonds seized the opportunity in the confusion and rallied. Bonds will look to post further gains during this period of uncertainty.
The other welcome news, in part for the bond market, was that an agreement was made to fund the debt ceiling into September. This helped the markets however at some time the deficit and increased issuance may sour the attractiveness of bonds.
Equities: The S&P 500 fell 2.5%. The Dow fell 2.9% and the Stoxx 600 fell 1.7%. The Vix closed at 23.34
Currencies: The Bloomberg Dollar Spot Index rose 0.2%. The euro fell 0.2%.
Bonds: The ten-year closed around at 2.823%. The 2-year closed at 2.28% and the 30-year closed at 3.058%. The ten-year bund closed at 0.529 and the UK gilt closed at 1.44% and the OAT closed at 0.77%. The U.S. curve closed 2/10 at 53.8 bp, 2/30 at 77.5 bp and the 10/30, closed at 23.4 bp. The U.S. 5-year closed at 2.62.
Commodities: The WTI fell 1.4%. Gold fell 0.3%.
Bitcoin is trading around $8,607.
Aussie Market Today.
The Aussie equity market will be weaker on the day, as the day appears to be a risk off trade. Until all the facts are known about tariffs in the U.S., markets will be skittish and uncertain.
Bonds should rally on the day, as bond markets were strong in both the U.S. and Europe. Short term rates look likely to continue to widen as borrowing costs in the U.S. remain high and because the Australian Banks fund offshore.
As rates climb, the Aussie banks will have to attract more deposits and this will push short term rates even higher. Foreign investors which own in excess of 50% of the local bonds are squeezing the market creating distortions.
Bonds are being lent by increasing volumes of repos. This suggests that liquidity is being drained from the system with the net effect that short-term funding rates have increased. This trend is likely to continue.