Australia dollar lifts as trade war contagion sweeps markets

DXY was soft last night as EUR lifted:

That was enough for the Australian dollar to lift a little against the USD but the trend lower is clear:

EMs cracked:

Gold firmed:

Oil was smashed:

Metals soft:

Miners too:

EM stocks belted:

Junk belted:

Treasuries soared:

Bunds soared:

Aussie bonds soared:

As stocks were belted. Those short term head and shoulders, and long term double top, patterns are ugly as sin:

Trade war news was limited but hopes for any G20 rapprochement were hosed at the SCMP:

“Given the current conditions, what can really come out of the G20?” said Zhang Yansheng, the chief research fellow at the state-backed China Centre for International Economic Exchanges think tank, at a government-arranged press briefing on Wednesday. “We in the East need to save our face whereas the Americans have complete disregard for that. I think we need to wait and see.”

While Zhang’s agency is not directly involved in planning Xi’s overseas trips, his comments suggest that Beijing is not in a rush to arrange a formal sit-down summit between the two leaders as they did in Argentina in December, playing down expectations that Trump and Xi are likely to meet next month to break the impasse in the trade talks.

US data was pretty good with new homes sales strong:

Unemployment claims strong:

Kansas City Fed OK:

The month-over-month composite index was 4 in May, similar to a reading of 5 in April but down from 10 in March. The composite index is an average of the production, new orders, employment, supplier delivery time, and raw materials inventory indexes. Growth continued to grow modestly at most durable and nondurable production plants, with stronger growth for food, plastics, and metals products. Most month-over-month indexes slowed slightly in May but remained positive, with production, shipments, and new orders indexes all decreasing. In contrast, the employment index rebounded from 2 to 5, and both inventory indexes also increased. Most year-over-year factory indexes showed little change, with the composite index inching higher from 22 to 23. The future composite index also edged up, moving from 11 to 12, and most future factory activity indexes remained stable or moved slightly higher.

But the market was spooked by a weak flash PMI:

▪ Flash U.S. Composite Output Index at 50.9 (53.0 in April). 36-month low.

▪ Flash U.S. Services Business Activity Index at 50.9 (53.0 in April). 39-month low.

▪ Flash U.S. Manufacturing PMI at 50.6 (52.6 in April). 116-month low.

▪ Flash U.S. Manufacturing Output Index at 50.8 (52.7 in April). 35-month low.

Not that Europe was much better:

▪ Flash Eurozone PMI Composite Output Index(1) at 51.6 (51.5 in April). 2-month high.

▪ Flash Eurozone Services PMI Activity Index(2) at 52.5 (52.8 in April). 4-month low.

▪ Flash Eurozone Manufacturing PMI Output Index(4) at 49.0 (48.0 in April). 3-month high.

▪ Flash Eurozone Manufacturing PMI(3) at 47.7 (47.9 in April). 2-month low.

This is not news to me. I expect the US to slow. Increasingly, enough for the Fed to ease as well. It’s hard to avoid the message being sent by the US bond market that rate cuts are coming.

As it is priced, this will place upwards pressure on the AUD. But given it will take further trade war spooking in the equity markets first, the downside case remains for the AUD before any Fed move. The market is sending all of the usual early warning signals that that pain is coming with oil and high yield debt breaking down.

Most interesting for Australia, if this really gets going then it is going to land like an anvil upon the housing bust before it can gain any stimulus foothold.

In which case, all bets will be off for RBA action and the AUD.

Comments

  1. We are in the 1st stages of a global recession that is going to intensify into year end

      • matthewMEMBER

        A trade deal will be to the detriment of the rest of the world and as each day passes with no deal there is incremental damage some of which is irriversable.Recession coming regardless

      • You still believe in trade deal?
        US showed its hand- aim is to ensure China never raises. IP rights is only window dressing. Huawei is not shut because of IP rights, they are just shut.. spying stuff.
        China never planned to give up stealing IP as so any other country including US. And China will not accept to only be cheap contract manufacturer for large US companies.
        So no deal.
        US is frantically threatening anyone that tries to trade with China and Russia. Moving forwards all countries will have to chose which block they will belong to. Two trading blocks and only trade between them will be resources other don’t have. IP rights will be stolen and abused and no one can sue the other side.
        UN will most likely be shut down.
        Dark view but I don’t see any other outcome. Recent events don’t really give room for any deal. By 20th June there will be nothing for Trump and Xi to talk. I even start to even doubt they’ll meet.

  2. Major home appliance shipments in the US don’t jive with the housing numbers, but maybe these are not houses for living in ?

    https://twitter.com/EconguyRosie/status/1131559878693183488/photo/1?ref_src=twsrc%5Etfw%7Ctwcamp%5Etweetembed%7Ctwterm%5E1131559878693183488&ref_url=https%3A%2F%2Fwww.zerohedge.com%2Fnews%2F2019-05-23%2Fcrude-crashes-yield-curve-collapses-stock-shorts-soar-4-year-highs

    Could be a demographic thing, I know we won’t be buying anything we don’t have to now we are retired

  3. St JacquesMEMBER

    Murdoch’s Herald Sun rag saying market volatility after elections is normal and property is about to bottom out (again). Massive cognitive dissonance. hahahahahahahahahahaha

      • St JacquesMEMBER

        Oh, I’m sorry, volatility only means “down”, not “bouncing aroound in an unstable and unpreictible manner”. Yes, it BOUNCED, so did the AUD, up, down, up, sort of…..
        And RE is “stabilizing” so it must be “bottoming”, so it’s all good for the New Normal. For Now. hahahahaha

      • I’m waiting for ScoMo to appear on the TV speaking in Tongues and doing god’s work.
        https://www.sbs.com.au/news/five-aspects-of-pentecostalism-that-shed-light-on-scott-morrison-s-politics

        That miracles happen is a central tenet of Pentecostalism. As a religion, it sees itself as re-creating the gifts of the Spirit experienced by the earliest Christian worshippers. Along with the working of miracles, these included speaking in tongues and healings. They remain central features of Pentecostal belief and worship today.

        So any minute now a miracle will come along to save “ship” Australia.

        This is the view that belief in God leads to material wealth. Salvation too has a connection to material wealth – “Jesus saves those who save”. So the godly become wealthy and the wealthy are godly. And, unfortunately, the ungodly become poor and the poor are ungodly.

        So if Jesus saves those who save, what does the RBA do to those who save?

  4. DingwallMEMBER

    “In which case, all bets will be off for RBA action and the AUD.”…………..Occasionally I have to re-read your commentary a few times as this sort of sentence just throws me. You’re current view is AUD trending down, with maybe the usual short-term gyrations and the RBA cutting a few times this year.
    That sentence suggests what ….. the trend down for both will be like the proverbial anvil? the opposite? the opposite to the moon? come to a standstill?

    • The phrase “all bets are off” is a bit contentious. In its original meaning it meant an unexpected event has rendered all bets void. Like a flood cancels the Melbourne Cup. Bets are off (and will be refunded).

      But often it’s used just to mean a “surprise event renders outcomes unpredictable”. But bets still count really. In today’s case bets are very much ON – with short bets looking good.

  5. Tech cold war escalating:

    (1) https://www.bbc.com/news/technology-48363772 – UK-based chip designer ARM has told staff it must suspend business with Huawei, according to internal documents obtained by the BBC.
    (2) https://asia.nikkei.com/Spotlight/Huawei-crackdown/Toshiba-suspends-shipments-to-Huawei
    (3) https://asia.nikkei.com/Spotlight/Huawei-crackdown/Panasonic-halts-business-with-Huawei-subject-to-US-ban

    That fact that Asian Review has an entire section dedicated to the Huawei crackdown says it all.

    • I noted yesterday in the trade war web cast thread. Huawei may be proper screwed by this. No good fabs on the mainland.

      They could be dropped 5-10 years behind the curve.

    • Figured I’d repost it.

      One bit of possibly useful information.

      Huawei don’t make chips.
      Their design company, Hisilicon, don’t make chips.
      Their 7nm chips are built by TSMC – most likely in FAB15 in Taiwan.

      The best fab I can find in China is also TSMC – 16nm. About 3 generations behind. TSMC are on record basically saying they were paranoid China would try stealing that tech. Speculating, but if they’re that paranoid, the possibility of armed takeover should have occurred to them, so It’s possible there’s some sort of “self-destruct” built into the plant. One concrete block from a decent height could destroy whatever equipment is most proprietary and render the 16nm lithography completely dead in that plant.

      The next best plant I could find is 20nm. About 4 generations behind.

      At the cutting edge, Only Intel, Global Foundaries and TSMC exist.
      Neither Intel or Global Foundries would defy the US Govt.

      TSMC *could*, but it’s incredibly likely the Taiwanese government would side with their protectors over their wannabe-conquerors.

      So… IF this persists, it’s not just Huawei. It’ll be ALL Chinese made devices. Period.
      Apple would probably be outright forced out of China by these rules too.

      They’ll be completely locked out of high-end silicon. Best they could manage with what they have is something around the Galaxy S5/6 chips.

      Even if they managed to steal the tech, Fab tech isn’t an easy game to commission.
      If they had to develop it domestically, they’re easily 10 years behind.

      In short: Their plans to move up the value chain in tech are crippled.

  6. This may be finally be that external shock the housing market has been waiting for.

    • Simon
      A black swan no one is talking about that has not been factored into any analysis and even to me I’m finding hard to see, but draghi leaves ECB on October 31 and that German guy might get in, don’t think he will continue with QE, and if ECB isn’t buying euro bonds I think Euro region sovereign gov interest rates will sky rocket, he’s said he’s not bailing out Italy and Greece.
      We could see Aust home loan mortgage rates double next year even if RBA cuts
      It’s a very large possibility
      All the analysis the Shane Oliver’s who I like but they aren’t looking globally which will have a much large effect on us than LORD SCOMO
      Simon the bounce over next 3 months will be minimal
      We will be resuming falls again later this year into next and so on

      • I’m an engineer not an economist, but that’s pretty much my take on things too. Scomo can fiddle all he likes, but there are larger forces at play that he has no control over.

        The house market may bounce for a while but next Spring’s selling season (Lol) is gonna be a pearler.

      • proofreadersMEMBER

        @bcnich: at what deposit rate does money start walking from the Oz banks? Read recently somewhere, that apparently almost $300bn of one of the big 4’s liabilities is in at call (or near enough), zero or negligible-interest paying accounts?

      • Proof i honestly don’t know
        my guess is everyone will think “banks are as safe as houses” as they say and will leave their money until they lose it and then just start blaming the government. Now it’s Scomo they’ll probably do that $250k guarantee again.
        I’s really like to know, is all the money just sitting in offset accounts classified as deposits.

      • Bcnich, this is where I am. The best-laid plans of mice and men often go awry, and we’re well overdue for big serving of awry.

  7. There will be no trade war agreement. The Chinese will not sign anything that makes them lose face and they have an extremely narrow definition of what constitutes ‘humiliating’. So narrow that almost anything the American propose will be considered humiliating. If they do sign something it will only be to buy time and within 12 months the Americans will be bleating about how the agreement isn’t being kept. I don’t think it’s possible to resurrect a good relationship between the two. Get used to more conflict of varying types between the US and China. This is now the new normal.

    China probably could have avoided this whole situation but I think they’ve backed themselves into something that is going to be very difficult to get out of.

    • IF companies do the rational thing and move to SE Asia, S America, India etc, Africa, it shouldn’t be too long before China’s unemployment spikes. Maybe a year. Many multinationals already have satellite sites.

      Other businesses still have competitors outside China. Maybe they were 10% more expensive, but now they’re 15% cheaper.

      How long before the Mandate from Heaven is revoked?

    • Yes. Xi stopped playing the long game because he wanted to be The Great Man who restored China to its Rightful Place in the World. He pushed too hard and now everybody, even the pitiful Australian gummint, is pushing back bigly.

      And now that Emperor Xi has played his stupidly aggressive hand there’s no way for him to back down and save face.

      This is going to end in tears.

      • mate China was on US radar for while now and US decided to act. There was no point of waiting any longer and it matters not who would have been in power in China.
        Xi and IP rights etc is all window dressing. This is much bigger game.

    • China could not avoid this. Lot of people are saying Xi overplayed his hand and he should have kept low profile etc.. I don’t think US were blind and did not notice the raise of China. No matter who China puts in power this was coming. US will not seat idle and just allow another country to take over.
      Now that gloves are off we just need to see how this will play out for us. And pray there will be no hot war while the world splits into two trading blocks – us and them.

      • > No matter who China puts in power this was coming.

        A reformer could have completely changed the outcome. Becoming equals at the table could have worked.

      • I’m not blaming Xi. This goes back much further than him. There were collective mistakes and missteps the Chinese governing entities made about their rise, esp after Deng passed away. They are the ones with the 5000 years of history and have been a major world power for much of that time. They study history. They understand the nature of power and weakness. They should have avoided some really simple things to do with magnitude and blatancy (such as ip theft) when it came to this period of national rejuvenation. Yes of course the US would push back but the Chinese could have and should have managed it so that the push back came at a time of their choosing, this manifestly is not. It is too soon. They should be masters at managing this type of thing.

      • Everyone has 5000 years of history.
        The CCP only has about 100. It was NOT a peaceful transition.

        Chinese history is full of bloody regime changes just like everyone else.

        People who think the Chinese are some sort of homogeneous group of patient people are glossing over every single time an impatient egomaniac like Mao long marched their way to the top.

    • Pop – at this age of multiple thank tank orgs it is impossible to fly under the radar for too long. There was no way China could have push much further than this without the push back from US.
      Under different scenario Chine could have lasted another 5 years max and then again US would have find a way to engage. They don’t need any legit excuse.. They can just say China also meddles in US elections and that’s it. Did US show any proof about Russia? There is hell lot more evidence of US meddling in all election around the world.
      China certainly made it bit easier.

  8. Trump was always going to get handed a crash right before the election with the media blame game focused on him as the cause and he has always known it. To me it looks like he is bringing on the crash anyway in the name of containing China to strengthen the US that way he hopes to get the public on board rather than against him. The global crashes have always been fabricated they are never accidental and out of the blue, but they have a purpose and it is never in our interests.