Daily Commentary BY THE CURVE TEAM –

US Administration Back Peddles Amid Market Funk

26th of June, 2018

The resolve of the Trump Administrations to follow through on their tough talk on trade was thrown in to question overnight. As the weakness from the Asian session flowed through to European and US markets, members of Trump’s administration were forced to back-pedal.

It has been a very interesting 24 hours for markets as the next round of trade wars appeared to be underway. Markets were under pressure during the Asian session following Trumps comments on European Car Tariffs and a Wall Street Journal article saying that foreign investment restrictions on Chinese companies was the next battle frontier.

The weakness then intensified through the European and into the US session and when I looked at the state of play in the early hours of this morning there was a sea of red across markets.

It was then that we got our first indication of what might actually spook the US administration in their quest for fairer trade. It’s not the threat of retaliation but weakness in the key indicator that they use for their performance, the stock market.

The first to surface was Treasury Secretary Steve Mnuchin who, using the administrations favourite communication tool twitter, tweeted:

“on behalf of @realDonaldTrump, the stories on investment restrictions in Bloomberg & WSJ are false. fake news. The leaker either doesn’t exist or know the subject very well. Statement will be out not specific to China, but to all countries that are trying to steal our technology”

That was the first sign of backtracking but it wasn’t enough to impact the market. Then entered Trump’s right hand man on trade, Peter Navarro. He had plenty more to say on reassuring people that the US economy was fine and everything would work out with China. However he then went on to contradict Mnuchin, saying “there’s no plans to impose investment restrictions on any countries that are interfering in any way with our country. This is not the plan.”

Despite the contradiction it was enough to see markets reverse off their lows while still finishing in the red. It seems like a bit of a knee jerk reaction and the trade battle is far from over. Especially as far as the Chinese are concerned judging by President Xi’s remarks.

It was reported that the Chinese leader said “in the West you have the notion that if somebody hits you on the left cheek, you turn the other cheek,” before adding “in our culture we punch back.”

It is important that we keep a close eye on how the battle for trade unfolds at a global level as Australia is a small open economy heavily reliant on international trade. While Australia is not directly involved in the heat of the battle, our biggest trading partner is which could impact their demand for our exports.

David Flanagan

Director - Interest Rate Markets