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Market Wrap 31/08/2018

By: Victor Yan


Equities:

ASX futures rose by 12 points despite renewed concerns surrounding the U.S. – China trade war, fueled by a potential Trump plan to impose Chinese import tariffs worth $200 billion, next week. While materiality in these plans will certainly implicate adverse effects on the ASX, the market’s seemingly paradoxical movement can be attributed to the decision not being “finalized” yet, or the likelihood of a lagged effect, as many posit that while a tariff announcement could come as soon as next week, its implementation could take place at a later date.

U.S. stocks reacted negatively following the same trade war news, a stark contrast to their positive movements in recent weeks, when many were optimistic that a potential trade war between the U.S. and China would be evaded. However, it appears that harsh reality has withered away investor sentiment, as we saw the Dow Jones Industrial Average fall by 137.65 points to 25,986.92, the S&P 500 down 12.91 points to 2,901.13 and the Nasdaq Composite down 21.32 points to 8,088.36.

Commodities:

Oil prices have continued to appreciate, with benchmark Brent and light crude oil both up 30 cents a barrel.  As the world takes notice of a tightening global oil market, following U.S. sanctions on crude oil exports from Iran, and a subsequent depletion in U.S. crude inventories to the tune of 2.6 million barrels, Brent has risen by nearly 10% over the past two weeks.

Trade tensions between the U.S. and China have further slowed bilateral soybean trade between the Western and Eastern giants. With harvest season approaching in the U.S., local farmers have expressed concerns of faltering export demand for their soybeans (understandably after a 25% tariff imposed by Beijing on soybean exports in July). Forecasts suggest that China’s 2018/19 season could see soybean imports drop from 96 million tons to 86 million tons if the trade war continues.

Forex:

According to the China Foreign Exchange Trade System, the Chinese yuan had weakened by 41 basis points to 6.81 against the U.S. dollar on Thursday. In China’s spot foreign exchange market, the yuan is allowed deviations of 2% either side of the central parity, each trading day. This is in stark contrast to the Yuan’s upwards movement on Friday after the central bank’s declaration of a “counter-cyclical” factor in calculating its guidance rate as a means of stabilizing the currency, with pundits attributing Friday’s appreciation to “knee-jerk” reactions following the PBOC’s announcement. Given that China must brace for a wave of U.S. tariffs later next month, this may cause further weakening of its currency.

In other news, the AUD fell in a second consecutive session on Wednesday to 72.63 US cents, fueled by rising doubts towards the prospect of the RBA raising interest rates. Australia’s interest rate has maintained a historic low of 1.5% since August 2016. While used as a tool by the RBA to help stimulate economic expansion, its low rates have dried up capital inflows fueling the AUD.

Bonds:

U.S. government debt yields saw minimal changes, with the yield on the benchmark 10-year Treasury note up marginally to 2.884%, and the 30-year Treasury yield down to 3.023%. Wednesday saw an auction totaling $31 billion in 7-year notes by the Treasury Department at a high yield of 2.844% – this latest auction forms part of a string of debt sales to assist the federal government in funding higher budget deficits. In contrast, Australia’s 10 and 30-year government bond yields clocked in at 2.57% and 3.094% respectively.

Other Assets:

Amidst an unprecedented currency catastrophe, it appears that Turkey’s living nightmare has just worsened. Following reports of the resignation of Turkey’s deputy bank-chief Erkan Kilimci, the lira had to brace against heavy selling again this week, despite Turkey President Recep Erdogan placing restrictions on short selling the currency. Having seen around a 40% depreciation against the U.S. dollar since the beginning of the year, the lira plummeted by roughly 5% on Thursday. Currently, the greenback is worth 6.78 lira. The rivalry between Trump and Erdogan over the American pastor Andrew Brunson, taken political prisoner on Turkish soil, precipitated the downfall in lira. Personal commentators such as the Economist have cited Brunson as perhaps “the world’s most expensive prisoner”. Political squabbles aside, the economic community have been consistently perplexed by Erdogan’s iron-fist refusal to mend the lira by hiking interest rates, which he describes as the “mother and father of all evil”. Depending on the way you look at it, the situation that persists can be almost comically attributed to either a petty vendetta between Trump and Erdogan, or the Turkish president’s lack of basic economic knowledge.


Sources: Reuters, CNBC, Bloomberg, Business Insider, Australian Financial Review, The Sydney Morning Herald, The Economist

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