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8@eight: ASX set to fall amid fears of escalating trade tensions

The long and short of it

1. Risk-off again as geopolitical issues reign: Hopes for a positive outcome from this week’s US-China trade negotiations diminished overnight, and that sent stocks lower and safe-havens higher. Numerous stories inflamed and fanned fears that the US and China remain miles apart when it comes to trade and foreign policy Investors were also glued to Brexit developments, with hopes for a surprise breakthrough between the UK and Europe also diminishing. Fed Chair Jerome Powell delivered a speech during the Wall Street trading session, in which he managed to somewhat settle investors nerves about an economic slowdown.

2. Trade war takes on a new moral dimension: As China’s trade negotiators jump onto planes to Washington to begin trade talks, several stories in the past 24 hours have surfaced that will only complicate already complex trade issues. The thorniest will be the US decision to blacklist several Chinese companies for its involvement in human rights abuses by the Chinese Communist Party against China’s Muslim Uyghur minority in Xinjiang. The decision from the Trump White House to use trade policy to punish China for its human rights abuses has added a new dimension to the trade war. Trade policy is now apparently being used to hurt China for its moral failings, adding a murky philosophical bent to the conflict.

3. The US, China and a clash of cultures: For an act that must seem like egregious sanctimony – no matter how clearly justifiable objections to China’s human rights abuses happen to be – the Chinese Communist Party has declared that market participants ought to “stay tuned” for its retaliation to the US moves. Investors will wait with bated breath to learn what that means. But it seems clear that the trade war is becoming somewhat of a clash of cultures. Case in point was another slightly left-field story on Tuesday: China’s decision to stop televising NBA basketball games in response to a tweet published by one of the league’s general franchise managers that expressed support for protesters in Hong Kong.

4. US still mulling capital market restrictions on China: Of course, the trade war primarily remains an economic battle, and there were some developments on that front on Tuesday, too. Somewhat contradicting previous statements that the White House wasn’t considering banning Chinese companies from listing on US stock exchanges, reports were released during North American trade that the Trump administration is considering limiting the volume of Chinese stocks that US pension funds are allowed to invest in. That news has thrown back into the equation the chance that trade sanctions could transform into capital market restrictions – a move, if it were to materialise, could wreak considerable pain of global financial markets.

5. China’s markets return without a hiccup (initially): The turmoil in the US session, which has seen the S&P500 drop just shy of 1 per cent, bucked a surprisingly relative calm in Asian markets on Tuesday. To the puzzlement of investors, Chinese stock markets returned to trading on Tuesday, and despite a plethora of reasons to fall, or at least display some level of volatility, managed to come back online without a hitch. It supported a notionally positive day for Asian stocks, with the ASX200 climbing another half a per cent. Of course, that looks likely to change this morning, as Wall Street’s negative lead sets up equity indices in Asia for a soft start today.

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6. Powell speech reaffirms the Fed’s company line: There proved one very negligible mitigant to last night’s Wall Street sell-off. And that was a speech delivered by US Fed Chair Jerome Powell. Entitled “Data dependence in an evolving economy” the Fed head used his speech to pledge to markets, primarily, a raft of new measures designed to address the volatility recently seen in short-term US money markets. But broader macro issues were also touched upon. Powell suggested that the recent weakness in the US economy belies the fundamental strength of the US economy, that recent rate cuts are a part of a “mid-cycle adjustment”, and the Fed is on standby with policy support if required.

7. A Brexit deal still miles away: Crossing to European trade, and the news flow was dominated by Brexit developments. And the news, as far as market participants are concerned, took on a negative bent. Headlines flashed that British Prime Minister Boris Johnson had told German Chancellor Angela Merkel that a Brexit deal was impossible if any proposal included Northern Ireland remaining in the EU’s customs union. It seems that neither side will back down on this issue – and that means a Brexit deal is highly unlikely. The news pushed the British pound into the deep 1.22 handle. Stocks in the European session also broadly fell.

8. Market watch: 

  • ASX futures down 64 points or 1% to 6502 at about 7:25am AEDT
  • AUD -0.1% to 67.29 US cents
  • On Wall St: Dow -1.2% S&P 500 -1.6% Nasdaq -1.7%
  • In New York: BHP -0.7% Rio -0.9% Atlassian -6.7%
  • In Europe: Stoxx 50 -1.1% FTSE -0.8% CAC -1.2% DAX -1.1%
  • Nikkei 225 futures -1.4% Hang Seng futures -0.7%
  • Spot gold +0.5% to $US1501.49 an ounce at 12.40pm New York time
  • Brent crude -1% to $US57.75 a barrel
  • US oil -1.1% to $US52.19 a barrel
  • Iron ore +1.5% to $US94.77 a tonne
  • Dalian iron ore -0.2% to 656.5 yuan
  • LME aluminium +0.3% to $US1751.50 a tonne
  • LME copper -0.8% to $US5675.50 a tonne
  • 2-year yield: US 1.44% Australia 0.61%
  • 5-year yield: US 1.37% Australia 0.61%
  • 10-year yield: US 1.53% Australia 0.89% Germany -0.60%
  • 10-year US/Australia yield gap near 7.30am AEDT: 66 basis points

With wires. This column was produced in commercial partnership between The Sydney Morning Herald, The Age and IG

Listen to IG’s podcast Chatting Markets here

Information is of a general nature only.

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