The Monday Report

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World Overnight
SPI Overnight (Mar)	5924.00	+ 12.00	0.20%
S&P ASX 200	5928.90	– 44.40	– 0.74%
S&P500	2691.25	+ 13.58	0.51%
Nasdaq Comp	7257.87	+ 77.31	1.08%
DJIA	24538.06	– 70.92	– 0.29%
S&P500 VIX	19.59	– 2.88	– 12.82%
US 10-year yield	2.86	+ 0.05	1.89%
USD Index	89.96	– 0.35	– 0.39%
FTSE100	7069.90	– 105.74	– 1.47%
DAX30	11913.71	– 277.23	– 2.27%

By Greg Peel

Trade Winds

The Australian market was never going to ignore another big plunge on Wall Street on Thursday night regardless of the drivers behind it. But whereas we could argue back in early February that the local market had no reason to follow the US correction from a position of overblown valuation, given Australian stocks were not overvalued to anything like the same extent, this time the drivers are more far-reaching.

In short, reactionary commentators have suggested Trump’s tariffs are a risk to global economic growth, and may ultimately lead to global recession.

Two stock moves that stand out from Friday’s trade are Rio Tinto ((RIO)) and BlueScope steel ((BSL)). Rio exports aluminium to the US (early this century Rio acquired Canada’s Alcan) and it fell -1.3% on Friday given the pending imposition of a 10% US tariff. BlueScope ((BSL)) exports steel to the US but…and the but is important…has production facilities in the US as well as in Australia so the impact of the 25% US tariff cancels itself out. BlueScope rose 0.8% against the tide on Friday.

The materials sector fell a net -0.9%, with gold stocks stronger on the safe haven play, but just about every sector fell by a similar percentage. The outliers were telcos, which fell -1.7% on their own problems, utilities, which fell only -0.3% because they, too, supposedly provide safe haven and the banks, which only fell -0.4% because trade is not really their thing.

Of course, steel and aluminium alone did not spark selling across the local market, nor across the globe. It’s the implications What’s next? What will be the retaliation? How many export industries will be impacted?

It was a sell-now-and-ask-questions-later session on Friday. The ASX200 was down -70 points at lunchtime but bounced off support at 5900 to post a slightly less hysterical close.

Wall Street managed to turn around on Friday night, so the local futures were up 12 points on Saturday morning. But what we have now is simply another source of uncertainty, worry and volatility.

As an aside, Friday’s HIA data showed sales of detached houses fell -2.1% in February to be -14.9% off their peak high. HIA is forecasting a -5.1% fall in detached housing completions in 2018 and a -15% fall for apartments.

Heated Debate

Some 43% of US aluminium imports come from Canada, while 6% come from China. Chinese steel exports make up 3% of all imported US steel, amidst a pool of suppliers including Canada, Mexico, Brazil, Japan, the EU, India, South Korea and Australia.

The last time the US imposed a tariff on steel was early this century under George W. Bush. It was a tariff on those countries “dumping” cheap steel (ie China) and anyone who was playing by the rules (eg Canada, Australia) was exempted. At this stage, it appears Trump is not going to allow for any exemptions this time around.

At this stage. For that is part of the problem for Wall Street. The White House was incensed when Trump jumped the gun and announced the tariffs before the details had been settled on. Will there be exemptions? We don’t know yet. Could it be that 25% and 10% are opening gambits – “scare” numbers that Trump might be ready to rein in, to appear conciliatory, to levels he was happy with in the first place?

At this stage nobody knows, and that’s not what Wall Street likes. Nor does Wall Street like the speculation that “their man” in the White House, economic advisor Gary Cohn, may resign over the tariffs. Or that other respected members of the inner sanctum are also updating their CVs.

Nor can Wall Street even agree on the ramifications of the tariffs.

Argument 1: US manufacturers are forced to buy more expensive US steel, but because domestic production is insufficient to supply the industry as it is, even before we start talking boosted infrastructure spending, they must also buy imported steel at a 25% higher price.

The price of all manufactured goods with a steel component rises, leading to increased inflation.

Argument 2: Steel prices initially rise but higher prices, and the security of import tariffs, incentivises idled production and US producers start spewing the stuff out. Increased supply ultimately leads to lower steel prices.

One US broking house used this argument to downgrade its rating on Dow component US Steel on Friday night.

Stock markets do not like uncertainty – it leads to volatility. The Dow was down almost -400 points on Friday night before closing -70. The S&P500 closed up 0.5%, the Nasdaq 1.1%, and the Russell small cap index, filled with stocks that are not import/exporters, closed up 1.7%.

Underperformance for the Dow, once the dust settled, had nothing to do with tariffs. One broking house declared McDonalds is facing structural headwinds in the industry that suggest the fast food stalwart’s new one dollar meal menu will be a failure, and downgraded its rating. McDonalds fell -5%, heavily impacting the price average.

Thursday’s sharp sell-off, followed by Friday’s sharp turnaround, suggests Wall Street is clearly undecided about what it all means. We might note that the -6 basis point drop in the US ten-year bond yield on Thursday night was completely reversed on Friday night, to send the yield back to 2.86%, suggesting Thursday simply saw a knee-jerk, risk-off reaction.

Commodities

Spot Metals,Minerals & Energy Futures
Gold (oz)	1322.00	+ 1.60	0.12%
Silver (oz)	16.49	– 0.02	– 0.12%
Copper (lb)	3.11	– 0.01	– 0.35%
Aluminium (lb)	0.98	– 0.00	– 0.42%
Lead (lb)	1.11	+ 0.00	0.17%
Nickel (lb)	6.09	– 0.02	– 0.36%
Zinc (lb)	1.53	– 0.03	– 2.10%
West Texas Crude (Apr)	61.38	– 0.05	– 0.08%
Brent Crude (May)	64.46	+ 0.21	0.33%
Iron Ore (t)	77.65	– 1.95	– 2.45%

Base metal prices do not appear to be suffering any adverse effects from the tariff saga – aluminium has not much moved these past couple of session. Weakness in zinc on Friday night is unrelated.

We might point to a -2.5% fall in the price of steel input, iron ore, as being related, but there is a lot of noise around iron ore prices at the best of times, and particularly anytime either side of the China New Year break. Chinese steel manufacturers have scoffed at Trump’s tariffs, pointing out they are hardly meaningful when only 3% of US steel imports are from China.

The Aussie is steady again at US$0.7761 despite the US dollar index falling -0.4%.

The SPI Overnight closed up 12 points or 0.2%.

The Week Ahead

Presumably we’ll learn the “details” of Trump’s tariff plan sometime this week.

Then Wall Street can go back to worrying about inflation and the Fed again, given the February non-farm payrolls numbers are due on Friday.

Before that the US will see its services PMI tonight, factory orders tomorrow and private sector jobs and the Fed Beige Book on Wednesday.

Services PMIs will be posted across the globe today/night, including Caixin’s China numbers. China will release trade data on Thursday and inflation numbers on Friday.

The ECB holds a policy meeting on Thursday and the bank of Japan on Friday.

Locally, it's GDP week. We’ll see December quarter company profits and inventory numbers today, the current account, including terms of trade, tomorrow, and the final GDP result on Wednesday. Economists are forecasting 2.5% growth, down from 2.8% in the September quarter.

Monthly data releases this week include the services PMI, Building approvals and ANZ job ads today, retail sales tomorrow, the construction PMI on Wednesday, and trade balance on Thursday.

The RBA meets tomorrow, and Philip Lowe will speak on Wednesday.

The local result season is now done and dusted, shifting the focus back to macro issues such as trade. But in the wake of results comes the flood of ex-dividends.

Ex-divs come thick and fast this week, providing an opening handicap each day for the ASX200. The big one today is InvoCare ((IVC)) among plenty of others, but the week has only just begun.

Rudi will connect with Sky News Business on Tuesday, via Skype, at around 11.15am to discuss broker calls and the share market. On Thursday he'll visit News ltd headquarters to appear in the studio noon-2pm. On Friday he'll repeat the Skype experience, probably around 11am.

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