Market Overview:
Markets eased into the weekend on low trade volumes with a lack of economic data making for an uneventful close to the week. Over the weekend the OPEC meeting was held in Vienna attended by the wealthiest oil producing nations. The organisation has agreed to increase oil production and by 1M barrels per day starting in July. At this point they are unsure exactly which countries will be boosting their current production. Markets have countered the 1M production indicating this could be more like 600M to 800M barrels per day. The news boosted oil prices from mid 66.00 to over 68.00 per barrel. President Trump has directly blamed OPEC’s production cuts for higher prices recently. He urged OPEC to keep prices down, ironically even though the hiked prices in crude have come about since his decision to sanction Iran which has had a major impact. Markets Monday are already lower, the safe haven JPY has benefited 40 points since the open. China is holding its ground in the face of further threats by Trump but China’s option could be limited as they seek to avoid an all out war. The Chinese government doesn’t want to show any weakness as they come under further pressure but we have seen a lot of media coming out of China to suggest they will fight any trade war to the bitter end. President Trump after all is unravelling 30 years of globalised trade systems and agreements. The S&P is trading at 2754, DOW 24580, Nasdaq 7687, Gold 1,270.95 and the US Dollar index is at 94.16 a 5-day low. Equities and Commodity markets may struggle to trade higher over the coming days as trade tensions continue to dampen market sentiment. RBNZ cash rate announcement publishes Thursday with the benchmark rate expecting to remain unchanged at 1.75%, but with weaker fundamental data releasing recently the monetary statement will be key to any moves higher. The biggest economic release on the US docket this week is quarterly GDP which prints Friday with expectations of around 2.2% down from March’s figure of 2.9%. In early news this morning the EU have responded from the US tariffs on European steel and Aluminum by raising tariffs on US made motorcycles from 6% to 31%. This will have a huge effect on Harley Davidson who will now focus on shifting some of its production overseas to avoid the tariffs. This will cost them 90-100M this year alone. The additional tariffs on their motorcycles equates to an average of USD 2,200 on each retail cost of a bike.
Australia
I can’t remember the last time we had zero, nil, nuda on the economic weekly docket. The Australian Dollar will sit on the sidelines this week with nothing going on locally. This will mean the currency could bounce around a little and perhaps be caught in the crossfire of further US trade tariff uncertainties, which coincidentally has already kicked off this week with the Aussie trading lower. With the RBA facing challenges with falling house prices and stunted wage price growth we are very bearish on a lower Australian Dollar this week. A retest of 0.7350 of last week lows could enter play.
New Zealand
Winston Peters is now the acting Prime Minister after Jacinda Ardern gave birth to a baby girl called Neve late last week. The New Zealand dollar inched higher Friday managing to hold onto two days’ worth of gains. It was a uneventful close to the week, the New Zealand dollar well supported after earlier in the week being squeezed lower based on negative risk sentiment. NZ first quarter GDP has published bang on expectations of 0.5% slightly lower than the March figure but more importantly weaker from 2.7% year on year from 2.9%. The RBNZ cash rate announcement is Thursday and should remain unchanged at 1.75%. The statement which will follow will highlight weaker NZ economic data of late and softer growth. Higher inflation will get a mention especially since petrol pump prices have hit record highs lately. ANZ business confidence will print first on Wednesday which will more than likely show negative sentiment with NZ businesses. If the trade “war” concerns continue this week as we expect currency risk will be off the table and in theory the New Zealand Dollar (NZD) will trade broadly lower.
United States
International trade concerns are set to dominate the markets again this week with President Trump already stirring the pot tweeting the following during early Monday morning trading. “The United States is insisting that all countries that have placed artificial Trade Barriers and Tariffs on goods going into their country, remove those Barriers & Tariffs or be met with more than reciprocity by the U.S.A Trade must be fair and no longer a one-way street”- The Japanese Yen being a barometer of market risk sentiment is off 40 points. The EU have not escaped Trump’s attention saying he will impose new tariffs on the EU unless the EU removes trade tariffs already placed on the US. A 20% tariff will be placed on all motor vehicles entering the US. He went a step further barring all Chinese companies from investing in US technology based companies, these initiatives will be announced at the end of the week. The US calendar has a bunch of medium level data to release this week with quarterly GDP Thursday.
Europe
The EU now has a seat at the table of President Trump’s trade war talks. The US President issued comments suggesting he was now targeting the EU. This surely represents a dangerous move – by saying he would potentially add a 20% import tax to cars imported from EU countries unless they altered their own policies on US car makers. Getting involved in a trade war with a man who has little regard for long term consequences has serious downside. That aside the Euro has been able to make gains over the past week to 1.1650 with the US Dollar weirdly been fairly stable given they have been the conspirator of potential economic doom. Early this week we have German and Spanish CPI numbers. Currently the EUR holds above the long term low of 1.1530.
United Kingdom
The Bank of England has left their cash rate unchanged at 0.5% with the vote represented at 6-3 in favour. Earlier we suggested a 7-2 vote but 6-3 represents an early bullish indicator that the bank of England (BoE) may raise their rates soon. Brexit continues to be a complete shambles. The British are still playing for time, the British government need to get something sorted, and quick, or they may face a dysfunctional embarrassing exit from the EU, this would have dire results for the economy and those partners in the bloc. They have had two years to come to an agreement, they must agree to remain in the EU’s single market and accept EU jurisdiction to settle any further disputes. This will also resolve border controls between Northern Ireland and Irish Republic after Brexit. UK quarterly current account is published Friday and is expected to show less of a deficit over March figures of -18.4B and push the Pound higher.
Japan
The Japanese Yen spiked immediately upon the Monday open in response to Donald Trump posting threats to any nation who have unnecessary high tariffs on American made products. Markets turned risk averse while the Japanese Yen buyers pushed up the value to 109.50. The US is looking to further tighten Chinese investment in US technology firms. Karoda spoke at the central bank forum in Portugal late last week and endorsed a Bank of Japan (BoJ) call for employers to raise wages by 3% per year which is faster than the current pace in an effort for the central bank to meet its inflation target. This week we have Japanese Retail Sales and the Unemployment rate which is widely expected to be steady at 2.5%
Canada
Canadian data disappointed Friday with monthly CPI coming in lighter than expected at 0.1% from 0.4% economists predicted with Retail Sales also well down on predictions of 0.1% versus 0.5% expected. A July rate hike is still on the cards with the overall recent economic data keeping confidence high. The Canadian Dollar (CAD) weakened over the releases but was back in favour as buyers of CAD returned after a rise in Crude Oil production by 1M barrels per day was agreed at the OPEC meeting. Oil values went higher to 68.50 dragging the Canadian Dollar (CAD) with it to 1.3260. If trade war speak occupies the media this week we will see the US Dollar (USD) push higher with 1.3780 the high of March 2017 creeping into sight.
Major Announcements last week:
- Bank of England keeps cash rate on hold at 0.50%
- Trade talks dampen investor confidence again
- NZ GDP prints at 0.50% but y/y improves
- OPEC raise the production of oil to an additional 1M barrels per day
- Canadian CPI falls short at 0.1% based on 0.4% expected
- US Bulding permits lower at 1.30M based on 1.35M