Daily Commentary BY THE CURVE TEAM –

China’s Soft Hand Boosts Sentiment

21st of September, 2018

China’s soft handed approach to the latest trade war escalation from the US has helped extend the relief rally for another session.

Markets were in an ebullient mood again as China’s soft handed approach helps deescalate the fear of a tariff induced downturn. Rather than go head to head with the US, China is looking to reduce import tariffs from a number of other nations.

This has a two fold effect.  It effectively lowers the costs of imports which will help offset the tariffs on exports. It also keeps other major trading partners on side and reduced the risk that they too will purse China in the same manner that the US is.

So it was another night of new highs for US equities while the USD remains under pressure as the crowded long USD trade starts to unwind. Of course that could all change next week when the Fed meets if they ratchet up forward guidance for future rate hikes.

The AUD has been a big beneficiary of the USD weakness with the Aussie trading back up near 0.73 and zoning in on key overhead resistance. The RBA will be watching the move closely as a break out and run higher has obvious implications for the overall setting of money policy. A higher AUD can act as a handbrake on growth.

Another headwind to growth and the biggest risk to the outlook, the consumer, was in the news again. The AFR yesterday ran an article on further research from UBS on the looming wave of mortgage resets from interest only to P&I which you can find here.

As highlighted by the RBA over the past month, where credit growth goes, so does the economy. Further tightening of credit standards which reduced borrowing costs and higher interest rates will keep downward pressure on credit growth and in doing so, provide a headwind to growth.

The changing dynamics in credit markets will takes years to come into full effect so it won’t be blindingly obvious but will creep up slowly. It is something to be aware of over the years ahead.

David Flanagan

Director - Interest Rate Markets