Morning Commentary: What Goes Up Must Come Down

Foreign Exchange - Morning Commentary
What Goes Up Must Come Down
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Andrew Kositkun
Andrew Kositkun
Foreign Exchange Head Trader
Equity markets have spent the better part of the last two months melting higher on hopes of an overall cooling of global trade tensions, including a Phase 1 US-China trade deal.  However, over the past couple trading sessions, the Tariff Man has returned and pushed global equities into the red.    

Yesterday, President Trump proposed tariffs on Brazilian and Argentine steel in response to “massive devaluations” of their currencies.  Now, Trump is focused on France and threatening tariffs of up to 100% on $2.4 billion of exports in response to France’s tax on digital revenues.  The US’s position is that this tax “discriminates against US companies” as the majority of digital revenues comes from US companies such as Apple and Google.  As would be expected, France has vowed for a unified EU retaliation should the US follow through on its threat.  On its own, the tariffs referred to above are unlikely to have a major economic impact but they do serve as a reminder that the US Administration remains hawkish on trade policy against all countries, not just China.       

Speaking of China, uncertainty around the Phase 1 deal between US and China has risen again.  In yesterday’s morning commentary, we flagged the risk of increased brinksmanship as the December 15 tariff deadline approached and this appears to have been realized.  Speaking at the NATO summit in London earlier this morning, Trump stated that he would be happy to wait until after the 2020 election to do a trade deal with China, throwing cold water on hopes a deal could be struck within weeks.  Additionally, China is set publish a list of unreliable entities which paves the way for sanctions against US companies. 

Market consensus still remains for some sort of deal and Trump’s actions against France, Brazil and Argentina could simply be to boost his tariff man image for the homestretch with China.  However, there is clearly more uncertainty now than just a few days ago as evidenced by reports today the the US is still planning for December 15 tariffs.  With time running out and with equity markets having moved higher on hopes of a deal, markets remain vulnerable to a sharp correction should expectations not be met.   
  • The employment component for yesterday’s ISM manufacturing print fell to 46.6 from 47.7 in October.  Combined with initial jobless claims rising to the highest reading since mid-June, there appears to be downside risk to Friday’s jobs report.   
  • The Reserve Bank of Australia kept rates steady at 0.75%, as expected.  The bank’s outlook was surprisingly upbeat with the statement emphasizing a clear wait and see approach.  Given this, the bank still warned of concerns around consumer spending and gave guidance for an extended period of low rates.  The odds of a February cut still remain above 50%.
  • According to reports, the Japanese government is evaluating the possibility of a stimulus package worth $120B to boost growth. 
  • The GBP has moved higher on the session as the first national poll in more than a week showed the Conservatives increasing their lead. 
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