Australian dollar smashed to new lows as USD roars

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The DXY rocket ship shows no signs of slowing as EUR crashes:

AUD was pulverised against DMs:

And EMs:

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Gold is hanging onto Iran like a drowning man:

Oil sold the Iran deal fact as Trump pulled out:

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Base metals were mixed but trends are down:

Big miners eased:

EM stocks are hanging on by fingernails:

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As EM junk lets go:

Treasuries were sold a touch:

Bunds too:

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Stocks were flat:

Two big events overnight. Trump pulled out of the Iran deal as expected:

On May 8, 2018, the President announced his decision to cease the United States’ participation in the Joint Comprehensive Plan of Action (JCPOA), and to begin re-imposing the U.S. nuclear-related sanctions that were lifted to effectuate the JCPOA sanctions relief, following a wind-down period. In conjunction with this announcement, the President issued a National Security Presidential Memorandum (NSPM) directing the U.S. Department of the Treasury and other Departments and Agencies to take the actions necessary to implement his decision.

Consistent with the President’s guidance, Departments and Agencies will begin the process of implementing 90-day and 180-day wind-down periods for activities involving Iran that were consistent with the U.S. sanctions relief specified in the JCPOA. To effectuate the wind-down periods, today the State Department issued the necessary statutory sanctions waivers to provide for a wind-down period and plans to take appropriate action to keep such waivers in place for the duration of the relevant wind-down periods. As soon as is administratively feasible, the Department of the Treasury’s Office of Foreign Assets Control (OFAC) expects to revoke, or amend, as appropriate, general and specific licenses issued in connection with the JCPOA. At that time, OFAC will issue new authorizations to allow the wind down of transactions and activities that were authorized pursuant to the revoked or amended general and specific licenses. At the end of the 90-day and 180-day wind-down periods, the applicable sanctions will come back into full effect.

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This may prove to be largely symbolic. France and Britain are committed:

Our governments remain committed to ensuring the agreement is upheld, and will work with all the remaining parties to the deal to ensure this remains the case including through ensuring the continuing economic benefits to the Iranian people that are linked to the agreement.

We urge the US to ensure that the structures of the JCPoA can remain intact, and to avoid taking action which obstructs its full implementation by all other parties to the deal. After engaging with the US Administration in a thorough manner over the past months, we call on the US to do everything possible to preserve the gains for nuclear non-proliferation brought about by the JCPoA, by allowing for a continued enforcement of its main elements.

We encourage Iran to show restraint in response to the decision by the US; Iran must continue to meet its own obligations under the deal, cooperating fully and in a timely manner with IAEA inspection requirements. The IAEA must be able to continue to carry out its long-term verification and monitoring programme without restriction or hindrance. In turn, Iran should continue to receive the sanctions relief it is entitled to whilst it remains in compliance with the terms of the deal.

Things will turn on how aggressive the US is with others that now deal with Iran. I would not be surprised to see oil sell the fact aggressively here but we shall see.

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The second market-moving event was Italian elections, which hit stocks and bonds in that country, via the FT:

Italy edged towards a second general election within months after the failure of last-ditch efforts to break the political deadlock in the eurozone’s third-largest economy.

Sergio Mattarella, Italy’s president, held a final round of talks with the country’s political parties on Monday to check whether there had been any breakthrough in negotiations to form a government two months after a divisive election yielded a hung parliament.

…A repeat election within months would be unprecedented in postwar Italy, which endured decades of governmental instability. The protracted impasse has left Mr Mattarella to consider the appointment of a caretaker government to replace the incumbent centre-left government led by Paolo Gentiloni, but with a very limited mandate to shepherd the country to a new vote — possibly as early as July.

…“It would be the first time in the Republic’s history that the legislature ends before getting started. The parties should choose”, he said. Both Five Star and the League have ruled out supporting a national unity government involving all of the country’s political parties for an extended period of time.

Opinion polls since the election have shown further swings away from the centre with PD and FI down solidly:

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Both the anti-EUR MS5 and fascist LN have made the gains. This is the way it usually works. The longer the political disfunction, the more that radicals become an option for a frustrated centre.

What does it mean? Italy’s composite PMI is already sliding sharply:

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Another election won’t help.

But that’s not the main game. The return of political risk to the Continent is the biggest issue. In particular as it pertains to the sustainability of the EUR. The common currency is already headed back towards 1.10-15 versus USD which will in turn drive up DXY towards 100:

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This is coming anyway as the US economy takes over leadership of the cycle (JOLTS were huge last night) and interest rate spreads widen but if EUR risk rises it may make the move violent which could, in turn, metastasize the current Emerging Market capital outflow into a panic.

As China slows as well we could find ourselves back to 2015 with a bullet as DXY soars, EUR and EM currencies plunge, commodities (including oil) capitulate and the AUD crashes.

It’s a risk case given MS5 is not tearing away in the polls but it’s worth bearing in mind. The base case remains more AUD downside anyway as EUR corrects then China slows throughout H2.

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David Llewellyn-Smith is the chief strategist at the MB Fund which offers two options to benefit from a falling AUD so he is definitely talking his book. The first option is to use the MB Fund International Stocks Portfolio which is always 100% long as a part of your own asset allocation mix. The second option is to use an MB Fund tactical allocation in which we choose the asset mix for you, including exclusively international stocks, but with bonds and other assets as well to ensure a more conservative mix.

The recent performance of both is below:

Nucleus Relative Performance
If these themes interest you then contact us below. 
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The information on this blog contains general information and does not take into account your personal objectives, financial situation or needs. Past performance is not an indication of future performance. 

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About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.