President Trump’s election strategy in November seems clear already, and it is already weighing on markets globally. The US President, and his coterie of officials, appear intent on deflecting any blame for their allegedly inadequate response to the COVID-19 pandemic domestically, instead, heaping the blame on China for everything. President Trump and Secretary of State Mike Pompeo, have been busy pumping out rhetoric for the last four days to that effect. Populism to become popular appears to be back with a vengeance in Washington DC.
There may well be elements of truth to DC’s allegations. However, not one shred of concrete evidence has been presented by Washington DC to prove these allegations. Populist talk is cheap, and hard facts have never bothered the US President before, I will grant. Still, the threat of deteriorating relations with China abruptly ended last week’s markets rally. For obvious reasons, the timing could not be worse for this to occur. President Trump also has today once again mentioned complying with the trade deal, tariffs and punishing China if necessary. The threat of a resumption of the US/China trade war hangs over financial markets in Asia this morning. President Trump needs to put some hard facts on the table, or risk sending the world into an L-shaped, trade-war driven recession on top of a recession, that even bottomless monetary and fiscal responses cannot soften.
The damage from COVID-19 was plain to see in Asia this morning. April Manufacturing PMI’s from Indonesia, Malaysia, Myanmar, Philippines, South Korea, Taiwan and Vietnam all collapsing this morning from their already poor March prints. In Australia, ANZ Job Ads collapsed to -53.1% in April, following a 10.0% fall in March. Manufacturing PMIs to be released across Europe and Latin America, are likely to paint a similarly daunting picture. Honk Kong GDP is expected to fall 3.0% YoY today, and US Factory Orders look set to fall by 10.0%.
US Composite PMI is likely to fall to around 27.0 tomorrow with EU-wide PMIs and German Factory Orders likely to tell a similar story. Friday's US Nonfarm Payrolls for April are forecast to fall by a staggering 21 million jobs. The volte-face in sentiment—that I called completely wrong on Thursday—highlights just how fragile any rallies in asset markets are. Investors will run en masse for the emergency exits at the first hints of trouble. Last week's rally always had an emperor’s new clothes look to it, too much UV (shaped recovery), being harmful to the skin. The economic damage from COVID-19 is evident, as are the dangers of too much UV. Someone needs to tell the US President before he rolls out his go-to populism strategy as an election strategy.
Liquidity will be affected in Asia this week with a number of holidays falling due. Japan will be away until Thursday for Golden Week. Mainland China does not return until Wednesday. South Korea is away tomorrow, and most of South East Asia absent on Thursday for Vesak Day.
Wall Street’s slide extends into Asia today
Underwhelming results from Apple (NASDAQ:AAPL) and Amazon (NASDAQ:AMZN), but most especially Trump China-bashing, abruptly ended the week-long equity rally on Friday. The S&P 500 fell 2.80%, the NASDAQ dropped 3.20%, and the Dow Jones fell 2.53%. The fragility of a rally driven by hope versus reality, has been cruelly exposed.
More anti-China rhetoric from Washington DC over the weekend and this morning, along with nightmarish manufacturing PMIs across Asia, has seen Asian equities fall deeply into the red. Nikkei 225 futures, which remain open today, are down 2.85%. NASDAQ and S&P 500 futures are both 0.80% lower.
Elsewhere, the Straits Timess has fallen 2.70%, the Hang Seng has collapsed 4.0%, with the KOSPI is 1.90% lower. Jakarta and KL have fallen by 2.0%. A lower Australian dollar brings solace to Sydney, with the ASX 200 and All Ords eking out 0.80% gains.
President Trump’s threats to revisit tariffs and suspend the US-China trade agreement have spooked Asia today. It is hard to think of a worse piece of news for the region, even in rhetorical form. It is unlikely to be well received in Europe or the UK either. For that reason, we expect equities to remain heavily under pressure even if the COVID-19 data across the globe shows signs of improvements today.
Trump's trade uncertainty forces a rush into haven US dollars
The US dollar is broadly stronger this morning against both developed and developing market currencies, the Dollar Index rising 0.25% to 99.33 in early trading.
EUR/USD attempted and failed to break through its 100-day moving average on Friday, failing at 1.1000, and falling 0.30% to 1.0940 today. The single currency had a strong run higher last week and may need to correct further to 1.0900 before gathering the required strength to retest the recent highs.
The trade-sensitive Australian dollar caught a severe cold from President Trump on Friday. Having tested and failed at its 100-day moving average at 0.6560, AUD/USD plummeted 1.40% to 0.6420. This morning, the sell-off continued, as it fell to 0.6398. Trade war threats are an anathema to the AUD, with its resource-driven base and high beta to China. AUD/USD could quickly retreat to 0.6300 before finding support again.
The story is much the same for its Antipodean neighbour the New Zealand dollar. NZD/USD has fallen 1.50% from the highs on Friday, to 0.6040 this morning. Having failed ahead of 0.6200 last Thursday, the Kiwi could well retreat to near 0.5900 before finding a stable perch.
Todays continued fall in oil prices, as well as the trade war threats emanating from the US over the weekend, have seen the resource heavy Indonesian rupiah and Malaysian ringgit underperform. The USD/IDR has climbed 1.10% to 14,990.00 this morning, with a move back through 15,000.00 likely. USD/IDR has strong resistance at 15,500.00.
MYR has given back over half of its gains from last week versus the US dollar this morning. USD/MYR has risen nearly 400 points, or 1.0%, to 3.3350 from a 4.2950 open. USD/MYR has strong resistance at 4.3500, but a failure there opens the possibility of more losses to 4.4000.
Emerging markets, with their heavy manufacturing and export bias, and especially those with an oil bias, are the most vulnerable to increased US-China trade war fears. It seems nonsensical that such a thing could even be possible in the middle of a global pandemic, but until that sentiment subsides, emerging markets will remain unloved. We expect haven currencies such as the US Dollar, Swiss Franc and Japanese Yen to outperform.
Oil edges lower with trade tensions but is surprisingly resilient
Oil finished modestly higher on Friday, weathering the storm in equity markets as the OPEC+ production restrictions officially started. Comments from President Trump about punishing China over COVID-19, as well as trade threats, have seen the diverging price action between Brent and WTI in Asia.
Brent crude initially fell 90 cents to $23.00 a barrel today, but those losses have since been erased. Brent crude is now unchanged at $23.90 a barrel. With the OPEC+ production cuts starting last Friday, a steady stream of headlines implying robust compliance appears to be supporting Brent crude today. The absence of China and Japan also affecting liquidity. With Brent being the international pricing benchmark for oil, OPEC+ compliance has a more significant effect on Brent prices than the much more US-centric WTI contracts.
WTI futures have not fared as well. The Trump trade rhetoric has seen near date WTI take fright, falling 3.50% to $19.10 a barrel this morning.
A potential renewal of trade war hostilities is the last thing oil markets need right now. Even without the drumbeats from Washington DC, the economic data released this week will undoubtedly give markets a hard dose of reality. Both oil contracts have recovered impressively over the past two weeks, but much of the easy-win good news is now built into prices. Further gains will be hard going from here, and both contracts are now vulnerable to sharp pullbacks.
Gold’s great range-trade continues
Gold caused a haven buying tailwind on Friday, rising 0.90% to $1701.00 an ounce. But that just leaves gold dead-center of its one-month range between $1650.00 and $1750.00 an ounce. Gold looks set to continue its range-trading purgatory for some time yet. Traders will look to fade the extreme ends of the broader range, or quietly accumulate on dips until the day gold’s fundamentals reassert themselves.
Either way, a lot of zen-like patience will be required.