- Equities drop, safe havens soar as trade outlook darkens
- Bank of Canada meets today – may be a touch more optimistic
- Aussie resilient despite trade woes & RBA rate cut bets
Trade woes return to haunt stocks; yen & dollar cruise higher
Risk appetite turned sour again on Tuesday, as British and American traders returned to their desks after a long weekend and were met by more worrisome trade news. Recent reports citing Chinese officials suggest the real reason the negotiations broke down was that the US ‘kept adding new demands’, which China saw as increasingly unreasonable. More importantly, Beijing was infuriated by Washington’s attempt to shift the blame to China for the talks breaking down. Separate reports that China could ban rare earth exports to hit back at the US didn’t help either.
These headlines likely poured cold water on hopes for a swift resolution to this conflict, as it seems unlikely the negotiations will even restart anytime soon with differences running so deep. Wall Street closed in the red and futures point to a negative open today for the major indices as well. In the FX spectrum, the dollar and yen soared as investors increased their exposure to safer assets, with the greenback gaining even despite long-term US interest rates falling.
In the big picture, risk aversion may remain a dominant theme, as it’s quite hard to see talks resuming without both sides feeling pressure from either their economies or financial markets to do so. In other words, more pain may be in store for stocks before a deal becomes realistic again. The ‘wild card’ in this narrative is the Fed, which markets think will come to the rescue, judging by the 1½ rate cuts that are now priced in by December. Perhaps that’s why more severe losses in stocks have been avoided so far.
Will the BoC strike a slightly more confident tone?
The main event today will likely be the Bank of Canada (BoC) rate decision at 14:00 GMT. No change in policy is expected, so all the action will come from the signals in the accompanying statement. Stronger-than-expected economic data lately coupled with some hawkish remarks by Governor Poloz that interest rates could ‘still go up a bit’, argue for a slightly more confident tone overall, which may lift the loonie.
That said though, simmering trade tensions, softer oil prices, a still-vulnerable domestic housing market, and falling inflation expectations could keep a lid on the optimism – implying that any positive reaction may be relatively small.
Aussie holds up despite trade worries, looks to capex data
Strikingly, the Australian dollar was one of the best performers yesterday, staying resilient in the face of mounting trade concerns, with a little help from firmer iron ore prices. This resilience is all the more impressive considering that markets widely expect the RBA to cut rates at its meeting next week. The next focal point for the currency will be the capital expenditure figures for Q1 that are due out early on Thursday.
Taking a step back, the aussie may have bottomed for now. While more downside is still possible, especially if trade tensions escalate further, it’s worth considering that from a monetary policy perspective, a lot of doom and gloom is already reflected in the price. Two and a half cuts are now fully factored in by December, implying that anything short of clear signals for aggressive easing from the RBA could even trigger a rebound.
