By: Louis Portail
The ASX 200 bounced from last weeks’ $50 billion drop, closing at 6165.3 on Friday with energy stocks leading the charge. Origin Energy and Viva Energy rose 7.9% and 8.6%respectively, with the entire energy sector gaining 4.91% for the week. The gains were supported by buoyant oil prices, but news that President Trump intends to proceed with $200bn worth of tariffs on Chinese products softened oil futures late on Friday, suggesting the energy sector gains could be short-lived.
In the U.S, stocks rallied late on Friday after a volatile trading session following news of President Trump instructing aides to continue with $200bn of proposed tariffs on Chinese imports, despite US Treasury Secretary Steve Mnuchin seeking a meeting with top Chinese economic official Liu He on Thursday to defuse the ongoing trade war. The S&P 500 gained 1.2% for the week on the back of tech and energy stocks. Although market sentiment appeared briefly optimistic about the potential for constructive trade negotiations, the road ahead remains unclear. China’s ‘Made in China 2025’ industrial policy which targets greater global market share across 10 sectors means that its ability to offer tariff reprieves to the U.S may be limited, despite its willingness to de-escalate trade tensions.
Brent crude oil futures tested US$80 a barrel during the week before pulling back to $78.18 on Friday. U.S. crude inventories fell by 5.3 million barrels, well below analyst forecasts of 805,000 barrels. Furthermore, U.S. sanctions on Iranian oil exports, expected to come into effect in November have begun putting a squeeze on Iran’s outflows. Trump’s ultimatum to other nations to cease imports from Iran by November or face sanctions of their own, has taken effect with South Korea dropping imports to zero and India and China both reducing their purchases. Russian energy minister Alexander Novak, however, said while the sanctions will cause huge uncertainty in the market, Russia intends to increase production to offset any Iranian losses. Further adding upward price pressure was the land-fall of Hurricane Florence on the east coast of the U.S, which is tipped to cause a spike in near-term oil demand as more than a million residents are forced to evacuate.
Nickel prices reached 8-month lows on Friday closing at $US12,515 a tonne on Friday. Speculative shorting on the London Metals Exchange, combined with sliding steel futures and ongoing international trade concerns saw the metal – used to make stainless steel – reach its lowest point since December last year. There is speculation that China’s environment ministry may allow a more relaxed anti-smog policy during the winter, shortly after it announced intentions to force some regions to cut steel production by as much as 50%. Despite mixed reactions, market sentiment towards the potential for future production cuts sent steel futures down more than 4%.
Pound Sterling gained 1.3% against the U.S Dollar for the week. Investor apprehensions towards a no trade-deal Brexit were eased following an announcement by Brexit minister Dominic Raab on Friday – that Britain and the EU were close to a withdrawal agreement. Although confidence has grown with respect to a favourable Brexit deal, domestic uncertainty remains high. Britain’s opposition party intends to vote against Theresa May’s Brexit plan, with the BoE governor saying the UK property market would crash and mortgage rates would rocket if there was a chaotic no-deal Brexit. Sterling is regarded as a high-beta currency, with strong correlations with risk-appetite. Signs of a collapse in Brexit negotiations could see a flight to safety and the currency tumble.
U.S 10-year Treasury yields broke 3.0% for the first time since August, reaching 3.001% after treasuries sold off in anticipation of another rate hike at the end of this month. Retail sales figures grew just 0.1% last month, but July’s figures were revised upwards from 0.5 to 0.7%. Given consumer spending accounts for more than two thirds of U.S GDP, the data suggests strong economic growth can be expected, further reinforcing expectations of a second rate-hike before the end of 2018.
In Europe, ECB President Mario Draghi announced that uncertainty around inflation was decreasing, and the ECB are forecasting upcoming labour market and wage growth improvements. Analysts anticipate a rate hike in the second half of 2019, as the ECB confirms it is slowing quantitative easing by reducing monthly bond purchases from €30bn to €15bn this year. Although Draghi aims to ease rates upwards in the coming year, EU problem-child, Italy, has seen its cost of borrowing spiral up with the gap between Italian and German 10-year yields reaching 2.58%. Concerns that Italy’s cost of borrowing will increase further when the ECB ceases its bond-purchasing program at the end of this year, could pose a problem for Draghi as the ECB balances slowing quantitative easing, reducing its crisis-era stimulus program and maintaining monetary stability in the region.
Sources: Financial Times, Reuters, Australian Financial Review, CNBC