Daily Commentary BY THE CURVE TEAM –

Trade Wars Dominate G7 Debacle

12th of June, 2018

The group of 7 major developed economies met over the weekend and the result was anything but conciliatory. Despite the tussle over trade deteriorating into a school yard squabble, markets are a little more positive as risks around Italy and the future of the Eurozone ease.

Any hope that the meeting of the G7 would bring those involved closer together and put an end to trade wars dissipated straight after the meeting. President Trump disavowed the joint communication shortly after leaving the meeting after Canadian President, Justin Trudeau went on the offensive over Trump’s latest move on Tariffs.

Trump’s persistence of winning a better deal for American may backfire as the resolve of long held allies is being galvanised by his approach. In the wake of the G7, French President Macron said that:

“The American President may not mind being isolated, but neither do we mind signing a 6 country agreement if need be. Because these 6 countries represent values, they represent an economic market which has the weight of history behind it and which is now a true international force”.

It seems that things might get worse before they get better which only means more uncertainty ahead.

Markets don’t seem to mind too much as they seem focused on the improving situation in Europe. The Italian finance minister yesterday was quoted as saying

“we are not discussing any proposal to exit the Euro. The government it determined to avoid the materialisation of market conditions that push us towards an exit in any way”.

The new Italian government is clearly spooked by the volatility they saw in the aftermath previous comments and posturing about their future within the Eurozone. For now the risk has abated.

As all this has been unfolding, Trump has been engaged in his summit with Kim Jong Un after leaving the G7 early. This has been touted as the first of many meetings, so hopefully they get off on the right foot.

It could be a massive week for markets. Locally we get the latest business survey and finance approvals today, followed by consumer confidence tomorrow and employment data on Thursday.

Offshore we have the June Fed meeting this week where the FOMC is expected to lift rates and flag a continuation of the gradual path of monetary policy normalisation.

David Flanagan

Director - Interest Rate Markets