The Overnight Report: Trade Wars Reignite

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By Greg Peel

And Back Again

The ASX200 recovered yesterday what it lost on Wednesday. Things have quietened down in Italy given there will be no snap election, sending the Italian stock market back up and Italian yields back down.

However, an election has been averted given the two anti-establishment parties have agreed to form a government again, this time with a different set of ministers. So while the turmoil may be over for now, the new government, however long it lasts, will still be euro-sceptic.

The local index popped higher from the open but slipped back to settle at the point it had fallen from on Wednesday, trading sideways for the rest of the session. Sectors that fell on Wednesday recovered, and the defensives that rose on Wednesday hung in there, other than healthcare, which fell -0.5% on the stronger Aussie to be the only loser on the day.

The big movers were energy, up 2.3% on the oil price bounce, and materials, up 1.5% on stronger metals prices, while the banks were flat.

It was a busy day on the economic data front, but nothing market-moving.

Private capital expenditure rose 0.4% in the March quarter against 1.0% expectation. It seems disappointing but ANZ’s economists point to positive trends in the numbers.

Spending on plant & equipment rose 2.5% to mark a fourth consecutive quarterly gain and a 9.3% annual growth rate – the highest since the peak of mining investment in 2010-11. This is evidence non-mining is picking up the pace to offset the long-running mining drag.

Spending on buildings & structures fell -0.6%, which was to be expected given the cooling in housing.

Capex intentions also disappointed, with the second survey for FY19 intentions falling to 5% growth from 8% in the previous quarter. But ANZ is quick to point out intentions are typically understated, and “intentions” are rather ethereal and subject to change. The good news is the mining sector expects capex to be flat in FY18 on FY17, suggesting the bottom of the decline may have been reached.

Private sector credit grew 0.4% in April to remain up 5.1% year on year. Growth in owner occupier loans offset lower growth rates in investor loans for 6.0% net growth, the slowest pace since March 2014, while business loan growth accelerated to 4.3% year on year. Weak investor loan commitments noted in March data suggest that segment will begin to pull back more sharply in coming months, ANZ notes.

China’s official manufacturing PMI rose to 51.9 in May from 51.4 in April when 51.3 was forecast. The services PMI rose to 54.9 from 54.8. Smiles all round.

The other news of the day is that Amazon will restrict Australian shoppers from buying anywhere other than in the local Amazon shop as a response to too-hard GST requirements for the US and UK-based stores. The response from Australian shoppers to date is that the local Amazon store carries very few products by comparison with the international stores and at much higher prices.

We might have expected consumer discretionary to be up by more than 0.4% yesterday.

More Fun and Games?

The US will reimpose a 25% tariff on steel imports and 10% on aluminium from Canada, Mexico and the EU. In response, a shell-shocked Canada will impose the same tariffs in the other direction, while Mexico is considering just what it will slap a tariff on.

The EU had already been drawing up a list from the last time around.

Wall Street sold off on the news, as one might expect, but not to the extent seen earlier in the year when tariffs were first touted. The usual suspects copped it – your Boeings and Caterpillars – hence the Dow underperformed, while tech is largely immune, hence the Nasdaq only fell modestly.

Wall Street has become used to the notion that it’s all part of Trump’s Art of the Deal tactics and thus must be taken with a grain of salt. A NAFTA deal would have been signed by now if not for Canada and Mexico’s aversion to a sunset clause being a precondition.

There has been no talk of trade negotiations with the EU but the EU is ignoring Trump’s reimposition of sanctions on Iran.

There has been no mention of China, with which negotiations are still underway. China is the big fish, while just about everyone involved in trade on either side of the Canadian and Mexican borders is pro-NAFTA and against imposing tariffs on these close trading partners given the lose-lose implications.

There has been no mention of Australia, but I don’t think we’ve done anything wrong. We have slapped a GST on Amazon, but then Trump hates Jeff Bezos.

So Wall Street has adjusted slightly but in reality is not going to panic until the trade games play out.

In economic news, US consumer spending jumped 0.6% in April when 0.4% was expected, but the personal expenditure & consumption (PCE) measure of inflation, which the Fed prefers, rose only 0.2% to a flat 1.8% annual growth rate.

Nothing here to spark the Fed into panic.

Commodities

Base metal markets appear to have taken the tariff news in their stride.

Oil pulled back a bit following its big jump on Wednesday night.

The US dollar index is slightly lower but so is the Aussie, at US$0.7565. Forex traders tend to sell the Aussie on any global trade war fears.

Today

The SPI Overnight closed down -7 points, so no panic locally. It still suggests another test for the 6000 level nonetheless.

Manufacturing PMIs are due across the globe today, being the first of the month, while tonight it’s the US jobs report.

OceanaGold ((OGC)) will hold its AGM.

Rudi will connect with Sky News Business via Skype to talk share market and broker calls at around 11am.

The Australian share market over the past thirty days…

For more detail go to FNArena's Australian Broker Call Report, which is updated each morning, Mon-Fri.

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