Global markets were mixed on Friday, as the US S&P 500 and Dow touched record highs, capping a week that largely shrugged off trade worries. The key event to watch this week is US Federal Reserve's two-day policy meeting which will conclude Thursday morning AU/NZ time.
Last week the US finally imposed additional tariffs against China, bringing an end to weeks of uncertainty. The tariffs were actually lower than expected (10% instead of 25%), and markets rallied, indicating to us that “peak fear” around trade disputes may already be priced in the market. China’s response was also not as bad as feared, with China hitting another $60 billion of US imports in a tit-for-tat move.
Stock in Focus: Shanghai Composite (China Market Index)
As we have discussed previously, we believe China has the most to lose from an all-out trade war, and to date the Chinese market has been hit hard.
Many markets are at all-time highs such as the US and NZ markets, with the Australian market at a decade high, while the Chinese market is trading at close to a 4-year low.
Sentiment around Chinese stocks is depressed, and there will likely be opportunities for investors. While some sectors will be directly hit by trade disputes, such as electronics and machinery, other sectors such as the Banks have also been caught in a broader sell-off.
There is some optimism of late that China's government will ramp up spending to offset the impact of US tariffs. Speculation state-backed funds were buying shares also added to the upbeat sentiment, as have comments by Premier Li Keqiang that there would be no yuan devaluation. While the yuan's big drop dulls the impact of tariffs on China's sales to the US, it amplifies the impact on US exports to China. The implementation of tariffs on China has, in effect, resulted in quasi-tariffs applied to all its trading partners through the stronger US dollar.
Last year, China exported $US 505 billion of goods to the US while it only imported $US 129 billion from it. Chinese exports to the US are primarily a source of affordable low-value-add goods, such as furniture and bedding, toys and sports equipment and parts that American companies design and have cheaply made in China to be sold back to US consumers. Generally, this means the US does not “need” Chinese imports, so the consequence of trade restrictions would be American consumers paying more for low-cost products. By contrast, China imports food for its enormous population from the US, as well as high-value-add goods, such as aircraft, vehicles and electrical machinery, which cannot easily be replaced by another exporter. From a state of relative disadvantage, China has few options, and all-out retaliation by Beijing carries with it significant economic costs.
Overall, our base case view is that China will remain rationale, as they understand they have the most to lose from an all-out trade war. However, an all-out trade war remains a key risk for global markets.
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Australia & New Zealand Market Movers
The Australian share market made gains on Friday (ASX 200 index +0.41%) as strong gains in the mining sector have lifted the Australian share market to finish the week higher as a major ratings agency upgraded its outlook on the country's credit standing and trade war worries receded. Industrial and precious metal prices both rose in response to tariffs being “not as bad: as expected by the market , with some hitting multi-month highs last week. This boosted the local materials sector, with BHP Billiton and Rio Tinto leading the market for most of the week.
The New Zealand market was slightly higher on Friday (NZX 50 index +0.16%) as strong tourism data boosted prospects for airports and attraction operators such as Tourism Holdings. A2 Milk rose for a third day ahead of the reweighting of FTSE indices that it will have a larger presence in. Retailer Warehouse Group said its annual earnings fell 13% in a period of "significant change" for the business. Full-year earnings were near the top of its recent guidance, with the firm’s Noel Leeming appliance brand performing particularly well, in a difficult retail environment.
3 Things Markets Will be Watching this Week
1. Trade related news-flow is likely to continue to feature in headlines.
2. The US Federal Reserve makes an interest rate decision Thursday morning AU/NZ time.
3. The Reserve Bank of New Zealand also makes a monetary policy statement on Thursday morning.
Have a Great Day,
Team