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The Overnight Report: Tariffs Bite Back

Daily Market Reports | Jul 12 2018

World Overnight
SPI Overnight (Sep) 6166.00 – 8.00 – 0.13%
S&P ASX 200 6215.60 – 42.50 – 0.68%
S&P500 2774.02 – 19.82 – 0.71%
Nasdaq Comp 7716.61 – 42.59 – 0.55%
DJIA 24700.45 – 219.21 – 0.88%
S&P500 VIX 13.63 + 0.99 7.83%
US 10-year yield 2.84 – 0.03 – 1.08%
USD Index 94.72 + 0.59 0.63%
FTSE100 7591.96 – 100.08 – 1.30%
DAX30 12417.13 – 192.72 – 1.53%

By Greg Peel

Think Global, Act Local

News of tariffs to be imposed on another US$200bn of Chinese imports into the US broke after the bell on Wall Street on Tuesday night, leaving Asian markets as the first respondents yesterday. The US futures set the tone, and the close of the SPI futures yesterday morning, up 16 points, quickly became redundant.

The ASX200 fell swiftly from the open in a straight line, reaching the level it would close at by 11.15am. A tepid attempt to recover some ground early in the afternoon failed. There were three factors driving movements in the ASX200 sectors yesterday.

The overriding factor was the US tariffs, borne out most clearly in -1.0% fall in both energy and materials. The negative overall sentiment encouraged by trade war fears otherwise impacted on almost all sectors, leaving the banks, industrials and telcos each down -0.7%.

The biggest sector fall was reserved for utilities, and here we can look to home. “The national electricity market is largely broken,” said the ACCC chairman yesterday, while making 56 separate recommendations of how to fix it. Such measures that would cut household power bills by a quarter.

Good news for households, not so good for electricity providers. AGL Energy ((AGL)) plunged -6.9% to top the ASX200 losers’ board, sending the utilities sector (supposedly defensive) down -3.8%.

But the potential of more money in household budgets, and a 3.9% jump in Westpac’s consumer confidence index to its highest level since November 2013, ensured the consumer sectors swam against the macro tide. Discretionary rose 0.3% and staples 0.1%.

The only other sector managing “outperformance” against the index yesterday was healthcare, down only -0.2%, as the Aussie dollar dived. The Aussie’s down -1% this morning.

A fall of -0.7% for Australia’s market was shy of the response from most Asian markets. Japan fell -1.2% and China -1.8%.

Asian markets got it right. Aside from Wall Street switching into reverse last night, commodity prices have been clobbered. Copper is down -3%, WTI is down -5% and Brent -0.6%. Gold (supposedly defensive) is down -US$14.

The SPI Overnight is nevertheless only down -8 points this morning, suggesting a relatively sufficient response yesterday.

Getting a Bit Serious

When Trump imposed tariffs on US$35bn of Chinese imports, which came into effect last Friday, Wall Street’s response was (a) US$35bn is a bit of a drop in the bucket in GDP terms and (b), it’s a shot across the bow that will likely precipitate negotiations with Beijing.

Even when Beijing responded with its matched-out tit-for-tat, Wall Street still took it all in its stride and focused instead on the earnings season ahead. Hence the S&P500 made it all the way back to the top of its recent range on Tuesday night.

Trump had always threatened the big guns of further tariffs of US$200bn, or even US$500bn, but Wall Street was content to assume this was bravado intended to shock Beijing into compromise. But to date, China has remained silent. So Trump has shifted from rhetoric into action.

It wasn’t meant to get this far. Yet, still, Wall Street is acting with caution rather than in panic. A -200 point drop on the Dow is not that drastic, particularly after the week’s run-up, and at 25,000, two hundred Dow points ain’t what they used to be.

The US ten-year bond yield is down, but only by -3 points to 2.83%. Gold is down, instead of up, because the US dollar index is up 0.6%, mostly against the yen. The yen is usually a safe haven in times of macro uncertainty, but in this case Japan is a potential casualty in the crossfire of US-China engagement.

After two days of outperformance, as beaten-down US industrials saw some bargain hunting, the Dow returned to its previous form last night. The Nasdaq and Russell “outperformed” but still closed lower on the day. The FANGs did not play safe haven, and nor did small caps, probably because they have already rallied a very long way.

The defensive sectors fared best on the S&P500 and while the financials were down, they “outperformed” the index, with the first bank results due tonight. Energy was the worst performer, but not simply because of the trade war.

Commodities

Spot Metals,Minerals & Energy Futures
Gold (oz) 1241.00 – 14.00 – 1.12%
Silver (oz) 15.77 – 0.25 – 1.56%
Copper (lb) 2.78 – 0.09 – 3.09%
Aluminium (lb) 0.95 – 0.01 – 0.91%
Lead (lb) 0.99 – 0.05 – 4.55%
Nickel (lb) 6.25 – 0.11 – 1.80%
Zinc (lb) 1.17 – 0.03 – 2.70%
West Texas Crude (Aug) 70.61 – 3.60 – 4.85%
Brent Crude (Sep) 74.19 – 4.74 – 6.01%
Iron Ore (t) 62.70 – 0.50 – 0.79%

An escalating trade war is enough of a weight on oil prices. But last night it was also revealed that (a) Libyan production is now back on following the outage, (b) Saudi Arabia had already begun increasing production ahead of the recent OPEC meeting at which production increases were discussed, and (c) Trump has indicated he plans to talk tough with Putin in their upcoming meeting about raising Russian production to bring down oil prices (for Americans).

Throw in the stronger dollar and the weekly US crude inventory numbers, which came in lower than expected, mattered not. WTI fell -5% and Brent -6%.

There was blood on the floor of the LME. It was not that long ago copper was hitting multi-year highs. Since trade war talk began escalating, it’s been a one-way trip south.

In the case of Australia markets today, our resource sectors pre-empted such weakness yesterday, but one assumes such big moves in commodity prices will take their toll today nonetheless. The Aussie, which is down -1% at US$0.7367, at least provides some offset.

Today

The SPI Overnight closed down -8 points.

The US sees June CPI numbers tonight.

Rudi will travel to Surry Hills to appear on Sky News Business today, noon-2pm.

The Australian share market over the past thirty days…

BROKER RECOMMENDATION CHANGES PAST THREE TRADING DAYS
ALU ALTIUM Downgrade to Sell from Neutral UBS
APX APPEN Downgrade to Neutral from Buy UBS
BOQ BANK OF QUEENSLAND Upgrade to Buy from Neutral Citi
GTY GATEWAY LIFESTYLE Downgrade to Neutral from Buy UBS
IDX INTEGRAL DIAGNOSTICS Upgrade to Equal-weight from Underweight Morgan Stanley
ING INGHAMS GROUP Downgrade to Sell from Neutral UBS
JIN JUMBO INTERACTIVE Upgrade to Add from Hold Morgans
MFG MAGELLAN FINANCIAL GROUP Downgrade to Hold from Add Morgans
NXT NEXTDC Downgrade to Sell from Hold Deutsche Bank
PDL PENDAL GROUP Downgrade to Hold from Add Morgans
WSA WESTERN AREAS Upgrade to Hold from Sell Ord Minnett

For more detail go to FNArena's Australian Broker Call Report, which is updated each morning, Mon-Fri.

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