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Fundamental News May 20

Important Topics to consider this trading week

  • Trade War - Tariffs
  • European Parliament Elections
  • Brexit
  • USD – Fed Minutes
  • AUD & RBA
  • Australian federal election result
  • CAD
  • Important data for the coming week
  • Charts
  • Risk disclosure

Trade War - Tariffs       

Tariff is a tax that most politicians dream of. It is an in-direct tax that is passed onto consumers. Wage earners hate seeing their weekly pay packet deducted with income tax however, most modern tax systems peel money from citizens in a much greater manner via the in-direct tax system. In the case of the current trade wars situation it is supported by the “protection of American jobs” and “Buy American”.

Tariffs are now up 15% to an average of 18.3%, this is whole lot of new federal income that is being added to the coffers thanks to the consumer.

The trade wars situation can still escalated further. Europe is not exempt either and perhaps for now Trump is wanting to focus on China or send China a message that if you play ball with me, I can be nice to you as long as you do what I want.

The S&P is only down 3.2% from the peak, this means that stocks might have some catching

up to do. 2700 could be the next down leg. Volatility for the equity markets are still relatively low. Caution needed in a low liquidity environment.

Overall the trade wars is bad for the entire world. Chinese exports to the US are about -13% y/y. That is 0.5% of Chinese GDP but the effect on confidence is a worry.

 

In Europe the car industry is on tender hooks. The weakness in the European economy towards the end of 2018 was largely driven by the car manufactures. Changes such as emission certificate issues and overall confidence are weighing in and any restrictions on exports to the US will have greater impact.

From a political stand point President Trump will want to be the president that gets this sorted before the 2020 election campaigns are underway. He wants to be known as the President that sorted this and not the president that made consumables more expensive for the American people. If he fails to sort this then the Democrats will have some real eggs to throw at Trump. The Democrats will do anything to get rid of Trump, they hate him. Democrats have spent their entire energy since Trump became president on trying to get him impeached. Trump does not belong on Capitol Hill according to the Democrats and they will do anything to remove him from office. If the trade war is not solved by 2020 elections, this will be music to the ears of the Democrats.

China has a much longer view on trade outcome and unlike America it’s time span is much greater. They are looking out into the future. They do not have the issue of elections determining policy. This might explain why Trump is going hard at this and is focused on China. Within China the trade war is not being spoken about with the same spirit we see in America.

Trade wars will continue to dominate the headlines now that the threat of tariffs has become a real event. Most think that the situation will get sorted within a fair time frame and manner. What needs to be considered are the two different cultures. My experience tells me that the Chinese are not easy to deal with and what you see in one hand is not necessarily what you will see in the other hand.

In short.

America is playing the here and now game, we want a result our way.

China is playing the long game and will play their card close to their chest.


European Parliament Elections

The European Parliament Elections will be held between 23rd and 26th. The wave of nationalism that looked to be a threat to the current parliament looks as if it will not take effect in the numbers as first thought. The euroscepics will do well but will not have a huge impact. This for now will support the Euro rather than the Euro being smashed. It looks like that the Brexit party will have a voice in the parliament.

 

Brexit

Brexit is ongoing and continues to drive the pound lower against the USD.

Most recent events have been about the timeline for Theresa May’s departure. Keep in mind that May is a remainer and she has not been working for the people to resolve this.

She has not been flexible with her plan thus the situation has been like quicksand. 

UK political risks are building.

23-26 May EP elections. Polls predict a Tory defeat. May could resign or could be forced out if sufficient numbers of cabinet ministers were to resign or change the committee rules.

 

4 – 5 June. May intends to still be in her current role, she will attempt to bring forward her exit deal. If this was the case it would be more than likely rejected by the Labour party.

15 June.  National Conservative Convention could pass a vote of no confidence in Mrs May. She may consider that this might happen thus depart before this date.

Parliament summer recess, 24 July. If May is somehow still in her role as PM, then she could use the gathering from June 15 to arrange a deal to present her Brexit deal before 31 Oct.

 

With all considered a No deal is likely and this will continue to worry the markets. The next Tory PM will be a hard Brexiteer who will try to push the new deal but fail. A no deal could be seen better compared to May’s deal which would have been seen as a bad deal.

The flip side is that parliament has a clear majority to oppose the No deal and could pass a law to revoke article 50. If so then a general election or a 2nd referendum could be held.

Only politicians get away with all of this.  For many politicians they do not want Brexit as it is bad for their own future. The Euro zone supplies them with a good legs on the table jobs. Well paid jobs for the boys and girls.

EC is happy to see this drag out for as long as possible. Whilst the in fighting continues, the EC are giggling. The bottom line is it creates a “Hotel California” situation. You check out anytime you like but you can never leave.

 

USD – Fed Minutes

The Fed minutes this Thursday will be out dated when you consider that the trade war tariffs have been added to $200bn of Chinese goods. As well we now have trade talks that have broken down. Any tilt from the Fed should be looking at the global risk.

Powell will be commenting on Monday and this might have more impact given the updated trade situation and tariffs.

More than likely the trade situation will not escalate in the coming weeks and Fed Powell will express caution.

Given the tariff situation US growth could be softer in the near future as global growth and tariffs impact the data.

USD has the highest carry of any of the G10 currencies and should remain strong.

 

AUD & RBA

Labour market in Australia is showing weaker market ahead. Last week’s labour market data disappointed the markets and the unemployment rate climbed to 5.2% vs 5% consensus. 

The RBA pointed out great emphasis on the labour market noting, “The board will be paying close attention to developments in the labour market at its upcoming meetings”. For any future rate decisions will be heavily reliant on this data. This is a very clear signal to the markets from the RBA.

Governor Lowe will be speaking May 21. Look out for any further policy signals.

National Australia bank sent out a note last week that they are pricing in 2 rate cuts for this year and some sort of stimulus for 2020.

Australia will be heavily impacted from any trade tension talks between China and US.

 

Australian federal Election result

At today’s open of the markets the AUD found some support after the shock election result from the weekend. The Labor party of Bill Shorten was expected to win rather easy but failed to even come close. The sitting government regained power. The economy and taxes will always surface to the top. The opposition party was very focused on climate change and taxes. This did not go down very well with low income and middle income workers. The upper class are all for climate change taxes as it does not impact them to the same level as the majority and this was seen in the voting.

The opposition have a lot to think about. Do they reverse their very strong climate change and tax reform or do they start to water it down before the next election in 3 years.

Regardless of who is government, the coming years will give them many issues to deal with such as employment, lack of wage growth, declining property market in Sydney and Melbourne as well the global decline of growth. In this instance the current government will do a better job at managing the economy.

The labour party which is the backbone of the union movement, literally moved away from its supporters for the sake of climate change and higher taxes.

On top of this you also have the personalities. The Liberal leader and prime minister is friendly and connecting in an Aussie manner that connects with the public. On the other side was Bill Shorten, who often appears uncomfortable and not always transparent.

The worldwide knows that personalities play a role. Bill Shorten would never win a public personality contest.

Wanting to apply bulk reforms at this given time within the global economy was just a bad call. Both parties are totally aware of the headwinds that lie ahead for the economy. Introducing bulk reform now was just stupid.

 

CAD

Bank of Canada flagged ongoing uncertainty related to trade conflicts. They expect the risk to continue and signal caution until the bank meets again on May 29.

Canada does not have as much risk to China as Australia or the US. In March, nearly 75% of Canadian goods were exported to the US.  Exports to China were just 5%.

 

Important data for the coming week

  • Fed Powell speaks
  • AUD monetary policy meeting minutes
  • UK Inflation report
  • FOMC members Evans – Rosengren speak
  • NZ Retail sales
  • AUD Gov Lowe speaks
  • UK CPI y/y
  • CAD Retail sales
  • US FOMC meeting minute
  • EUR Various flash service PMI
  • EUR Parliamentary elections
  • UK Retail sales
  • Core durable goods

 

Charts below


USD Index

  

USD Index Daily

Price has been trading within this upper channel for some months and still holding. Looking at price to hold this pattern for now. Over 50% of the EUR makes up this Index thus always consider this index when trading

S&P500 Daily Chart

  

2800 held during the risk off situation from last week. Price might consolidate for now as volatility in the equities space has been low.

A challenge of 2800 and then 2740 looks more likely before a challenge of the most recent highs.

 

EURUSD Daily Chart

 


Things are starting to look heavy again. Keep in mind that the USD index daily chart is at the upper level of the daily band.

1.1100 will be the next most natural area for price to hold or break.

1.1250 area has proven very difficult to break.

 

AUDUSD Daily chart

 

Given the recent election outcome that is positive for AUD, we might see a relief rally back towards 0.7000

Lowe will be on the wires this week thus any future rate indication could be leaked during his talk.

 

Westpac Exchange Rates

 

Above is future exchange rates from Westpac. Do not trade this information as it is based on today’s climate and anything can change at any time.

Risk Disclosure

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