The Monday Report

Daily Market Reports | Mar 05 2018

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?

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