Australian dollar closes at 3 year lows as stocks crash

DXY was firm as CNY tanked last night:

The Australian dollar was belted against DMs, to three year closing lows versus the USD:

It was also weak versus EMs:

Gold jumped:

Oil sagged despite Iran tensions:

Metals were belted:

And big miners. GLEN is in trouble:

EM stocks were massacred:

As junk gave in:

Treasuries ripped:

Bunds were bid:

The Aussie long end hit all-time low yields:

As stocks were slammed:

Westpac has the wrap:

Event Wrap

China will raise tariffs on U.S. goods to 25% starting 1 June, according to a Bloomberg report which added that Beijing warned it “will never surrender to external pressure.”
Fed VC Clarida spoke about its review of monetary policy strategies, and noted the limited responsiveness of inflation response to capacity utilisation. Kashkari said the jobs market was quite healthy, although some slack was noted, and said the effect of tariff hikes would be monitored.

Event Outlook

NZREINZ house sales and prices may continue to reflect continuing subdued conditions, particularly in Auckland. Migration data for March is out but has attracted less attention since its methodology changes.

Australia: Apr NAB business survey last showed conditions at 7, having weakened since the latter part of 2018. A key focus in today’s report will be the employment sub-index with the RBA closely monitoring developments in the labour market.

Euro Area: Mar industrial production is released after national estimates have tended to slightly disappoint. May ZEW survey expectations is seen to rise to 5.0 from 3.1.

US: Apr NFIB small business optimism is expected to remain at a positive level. Fedspeak involves Williams on a panel at a SNB/IMF event in Zurich and George in Minnesota.

It’s not rocket surgery today. Via Bloomie:

U.S. stocks and commodities tumbled after China retaliated with higher tariffs on a range of American goods. Treasuries jumped with the Japanese yen on demand for haven assets.

…“China retaliating as fast as they did was a clear signal they’re not going to be pushed around,” said Samantha Azzarello, global market strategist for JPMorgan ETFs. “Markets would like a little bit more play nice and maybe even a bit of complacency from China. It was interesting it wasn’t done on the weekend. It was done just in time, Monday morning for markets to open.”

Not much hope in the jawbone, either, also at Bloomie:

President Donald Trump plans to meet his Chinese counterpart Xi Jinping at next month’s G-20 summit, an encounter that could prove pivotal in a deepening divide over trade that is sending stocks tumbling and clouding the outlook for the global economy.

Trump said the U.S. was expecting China to retaliate against American tariffs, but argued that Beijing still wants to make a deal. But he warned Xi’s government not to go too far in responding to U.S. trade actions.

Some fools are worried about inflation arising from the tariffs:

That is not the risk. This is:

The market reaction to the collapse of negotiations will determine whether or not the US and world enters recession. I have not been concerned about a US recession to date but the “no deal” scenario opens the way to 20-30% downside in stocks.  And the US is vulnerable to another shock of goodly magnitude with high inventories:

If consumers pause with a big sell-off and wealth shock then we could see an inventory cycle drop the US into recession and the world with it (which anything around 2% or below growth). Exactly the same calculus applies in Europe where inventories are also very high.

Worrying about inflation at this point is stupid, as bond markets make clear.

We don’t know if the “no deal” scenario is at hand. The market shock could be enough to drive the US and China back together swiftly for a decent deal. But at a certain point it makes more political sense to hang your enemy out to dry than buckle under him. China appears to have reached that point with stimulus already underway. The US is an open question. I’d put the following odds on it:

  • market correction and deal 20%
  • market correction and jawboning with lousy deal 40%
  • market correction with no deal and global recession 40%.

While this continues, CNY and AUD will fall.


    • DominicMEMBER

      This is the key point: recession arrives and rates are already at emergency lows while stimulus has been underway for sometime. Get ready for zero rates and massive deficit spending. We are at the end of the line already. And yet people up to the eyeballs in risk assets are oblivious. Unbelievable.

      • Dom we have started global recession that will get considerable worse H2
        No deal deal won’t matter
        Sentiment has turned
        Aust goung down very hard into H2
        This one will be brutal
        Think you’ll see AUST 10 year either side near zero this time next year

      • DominicMEMBER

        Savers have already been reamed since the GFC and things will only get worse. Time for legitimate capital preservation strategies. Holding cash these next few years will be disastrous. Official inflation might be very ‘low’ but actual inflation will be somewhere between high and rampant.

      • Proof readers
        Savers will possibly be paying a fee in gov bonds as they potentially go negative and term deposits will be not far off zero
        We are heading to a point where it’s not about return it’s going to be capital preservation or really try and lose as least as you can

      • So not holding cash sounds like a good idea, but where to in order to preserve your wealth? Gold? BTC? Assets? Bonds?

      • DominicMEMBER

        – While BTC has theoretically no inherent value the spike (vs CNY collapse) a bit earlier showed that part of its value is derived from it being a ‘flight haven’ and Chinese (and anywhere else) capital controls could actually accentuate this ‘value’ in future. The cost? Volatility.
        – Gold is an oldie but a goodie. No one’s liability and a reliable store of value over the medium/long term. You could buy it for just over US$200 an ounce at the turn of the century and now it is fairly comfortable at $1,300 (and looking cheap IMO). Your dilemma is whether you keep a stash at home or in a safe deposit somewhere — or maybe abroad.
        – Gold stocks. No storage issues but they can be volatile. I’m pretty conservative so I buy solid, mid-tier producers not the speccy stuff. They are looking okay value right now but could run up hard if the gold price takes off as every extra dollar in price flows to the bottom line. I’m waiting to add – probably in a few months, maybe sooner if the current weakness in stocks looks like it’s going to develop into something more serious.
        – Bonds are always a goodie when cash is looking for a haven from volatility in risk assets and/or the economy is weakening. My longer term concern is that huge deficit spending is going to cause the curve to steepen sharply and run over those holders with duration (med to long end of the curve). And if the RBA try and rein in the curve (yield targeting) the money printers will inevitably be cranked up to warp speed, which will just be bad news all round for ‘cash’ assets like bonds.

      • Gav- I figure on holding USD and US short term bonds and a few Aus Govt long bonds until I reckon Aus house prices and AUD have come down far enough. If my wife has her way that will be end 2019 but if a bona fide crash / recession is on, it may convince her to wait a bit longer.

        Then I will bring the money home and buy an O/O house. I may also hold a bit of cash in reserve (maybe still in USD) just until any recession / crash has hit and might then put it into some Aus shares, on the basis that they are cheap and should benefit from Aus QE inflating everything. Probably miners or something else that produces something the world still needs.

      • The Traveling Wilbur

        A2’s got the Universal MacroBusiness playbook and he’s running it step by step.

        +1. Sounds spot on. And exactly like what I’d do… which is probably a bad sign! LOL.

      • Oh noes if Wilbs gets on board do we need to take the contrarian position?!! 😉

        Worth noting that in one sense I am doing the ultra-conservative version of the MB playbook because it’s a housing deposit that I need soon. So now only about 5% equities, everything else cash and bonds. But that said, the forex risk is high (very long USD) but my margin of safety is pretty good at the moment vs what I bought in at.

    • “The U.S. is a self-sustaining economy. Almost 80% of our internal production and manufacturing is purchased within our own market. In the big picture – economic strength is an outcome of the ability of a nation, any nation, to support itself first and foremost. If a nations’ economy is dependent on other nations to survive it is less strong than a nation whose economy is more independent.”

      We’ve never been able to say that, but we were much closer to it once upon a time.

    • Haven’t watched it, but if it’s about causing manufacturing to leave China, then yeah, he’s on the money.

      I think it’s ultimately about hegemony. All of it. Pressuring NATO, China, everything.

  1. Is a hot war with Iran an option to offset no deal with China? Iraq took the market to new highs before it nearly ended the world.

    • Debt loads are too high now for overt stagflation to be endured……the way we got through the Seventies was with the cash rate set at the inflation rate…….not possible now without large debt defaults. Yanks would have to put their country on a real war footing to bring the private economy under control……….managed trade and capital.

  2. TighterandTighter

    Hmmm what to do with super allocation, everything henceforth into conservative

  3. So beyond investing in the MB fund. Could you reprint your strategy moving forward…

  4. So much cash gone into UBER and other massive money losing floats. DJI has an absolute classic tripple top. This could be a crash for the ages.