Today’s Key Market Drivers: 8th May 2019

US China trade talks get markets nervous once again.


US financial markets fell sharply on Tuesday with the biggest one-day loss since January after a US official said new tariffs will come into effect on China imports this coming Friday. The market had itself convinced on Monday that Donald Trump’s Sunday Tweet was just a threat and the increase in tariffs from 10% to 25% would not likely happen following more trade talks in Washington DC this week. Those hopes were dashed when U.S. Trade Representative Robert Lighthizer told reporters the U.S. will increase levies on Chinese imports on Friday.

What financial markets are worried about is a full-blown trade war which would significantly impact global economic growth that in recent months has been potentially showing a bottom. Some economists believe a US-China trade war would cut global growth by 0.5% and this would certainly not be good news for the Australian economy.

Emerging markets currencies including the Aussie and Kiwi Dollars will likely come under selling pressure if the trade war tensions continue to mount.

RBA takes the easy option in May.


The Reserve Bank of Australia took the “it’s election month” option yesterday and left the official cash rate on hold at 1.5% but should have dropped the cash rate by 0.25%. The reason I believe they didn’t drop rates is that they didn’t want to give political ammunition to either side of politics less than two weeks before the election. Their language was still dovish, the economy is still doing it tough and whilst the Aussie Dollar did rally post the statement any rally on the local currency is going to be seen as a shorting opportunity by investment banks and hedge funds.

Expect a rate cut on the first Tuesday of June.

RBNZ should cut rates today.


There is no election in New Zealand this month and today will see the RBNZ release their May statement with more than 50% of economists surveyed expecting a rate cut from 1.75% to 1.5%. The Kiwi Dollar continues to remain weak trading at the bottom of a recent trading range with novice traders no doubt looking to buy the lows and putting stops just below the pricing level of 0.6550. My expectation is the RBNZ will drop the official cash rate today, unlike the RBA they have no excuses and simply waiting another month or two is stalling the inevitable.

No economic data this week will overshadow the elephant in the room.


The trade talks between the US and China will overshadow any economic data this week and that includes the RBNZ statement today. Sure, the Kiwi Dollar will move sharply on the statement but investment banks and hedge funds will be far more concerned with trade developments between two of the world’s superpowers. This is a very big deal and the end result will have significant consequences for global markets.

If history is a guide the outcome is not likely pleasant in the short term. The ideal scenario is a “free trade deal” but that is highly unlikely to happen. What the market is looking for is a compromise but it appears after months of negotiation we are no closer to that either. The market will wait with bated breath for some sort of announcement later this week but I simply cannot see Trump standing down one inch. He’s a bully and when a bully like Trump has an election to win in 2020, he’s going to stand up to China as we’ve never seen a US President do in our lifetime. This isn’t over by a long shot, Trump has votes to win.

Nobody is suggesting the US and China will go to war over this trade deal, however, history does show that trade tensions between a rising superpower and an existing superpower have led to military conflict. We are a long way from that but we should not ignore the history books and we should not underestimate the willingness of Donald Trump to push China’s hot buttons and see just how far he can take this.


Stop saying I wish and start saying I will.

AB

 

About the Author: Andrew Barnett

Andrew is a professional trader and successful investor who has a strong focus on education. He is a regular Sky News Money Channel Guest and one of Australia’s most awarded and respected financial experts and is regularly contacted by the Australian Media for the latest on what is happening with the Australian Dollar. Director at LTG GoldRock, Andrew Barnett, guides thousands of traders around the world in the live market on a daily basis, advising them on buy and sell directions, as well as trading his own personal account. Andrew, a regular keynote speaker at trading and wealth-creation events throughout the Asia Pacific region, is an authorized representative registered with the Australian Securities and Investment Commission (ASIC).

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