Overnight: Tariff Turnaround

By Greg Peel

Hong Kong Phooey

It was a funny old session on the ASX yesterday. Typically the first 30 minutes, being the opening rotation, see the index head in one direction only before any turnaround, if that is to be the case, begins at 10.30am. Yesterday we had the Dow down close to -400 and our futures suggesting down -52, and sure enough at 10.08am, with only part of the market open, the ASX200 was down -32 points.

Then suddenly it turned, and just after 11am the index was up 3.

There followed a jagged sell-down and with twenty minutes left the index was again down -30, but a spike to the close brought us back to -21.

Somewhere in the middle of all this the Hong Kong airport reopened, before later being closed again. Whether or not that had something to do with it.

There was no pattern evident among sectors. Healthcare (-1.2%) was the worst performer, after Citi downgraded Cochlear ((COH)) to Sell to make five from seven Sell ratings on the FNArena database. Nothing wrong with the company, just too rich.

Healthcare has been an up and down story consistently for the last several sessions. Consumer discretionary has started following a similar patter, falling -1.1%.

Financials notably fell -0.5%, with falls in the banks overriding a positive earnings result from Challenger ((CGF)), while a jump in iron ore futures in the session saw materials rise +0.3%, with a little help from the gold miners yet again, and despite ongoing trashing of lithium stocks.

Fortescue Metal’s ((FMG)) 3.6% gain was enough to make it top index gainer on the day.

It would not be remiss to say the market really doesn’t have a clue at the moment and who could blame it. Interday volatility is one thing but intraday volatility simply underscores the current uncertainty of everything.

To wit, last night the president did somewhat of an about-face on tariffs. Today is another day. Our futures are up 48 points, if that means anything.

Campaign Angst?

Before last night’s opening bell on Wall Street, data showed the US headline and core CPIs both rose 0.3% in July, to push annual headline growth to 1.8% from 1.6% and core to 2.2% from 2.1%. While not unexpected, these numbers would not in isolation prompt the Fed to cut again, albeit the Fed prefers the PCE inflation  measure which on last count stood at 1.4%.

Wall Street opened to the downside but only briefly, because the White House then threw in a bombshell.

Of the US$300bn of goods set to see tariffs of 10% from September 1, around half will now enjoy a delay to mid-December. Most of the US$300bn represents consumer goods, but the delay has specifically been granted for cell phones, laptops, gaming consoles and selected toys and items of clothing and footwear.

Did you spot the connection? These are all goods that will likely turn up in many a Christmas stocking.

Apparently the decision was made after a phone call to Beijing, but there is no indication it involved any concessions from China. The move is most likely a reflection of constant pleading by US corporates that tariffs on consumer goods would kill off consumer demand at the most critical time of the year. And the US economy is totally reliant on the consumer.

Trump has said all along “China is paying the tariffs”. Everyone else knows that is bollocks – US importers are paying the tariffs and unless avoidable, passing the cost through to consumers. Trump’s advisors have likely warned him that if he had gone ahead with the full US$300 in September, ahead of the Thanksgiving gift buying spree, then he would be the Grinch. The US economy would suffer.

And thus Wall Street would suffer, and Trump does not want that to happen heading into an election year.

On the news, the Dow jumped 400 points in a heartbeat, and basically stayed around that level through to the close. The biggest influence on all three major indices was a 4.2% jump for Apple, its biggest one-day rally since May, given Apple is right in the tariff firing line and Christmas is a time to give iPhones.

Yet all the FAANG’s rallied, as did the chip stocks. All S&P500 sectors closed in the green, but it was the tech names that led the charge, as evidenced by a 2% gain for the Nasdaq against 1.5% for the S&P and Dow.

All along, China has been playing the Long Game. Pundits have for a time suggested Beijing will hold out right through to next year’s election in November, to see whether the destruction Trump wreaks on his own economy is enough to force a change of government. The US trade negotiators are planning another phone hook-up with Beijing in two weeks, but who now has the upper hand?

Meanwhile, that Long Game may well extend to Hong Kong as Beijing seeks to simply ride out the chaos and wear the protestors down, while at the same time amassing firepower at the border and going close to labelling the protestors as “terrorists”. If this accusation is made officially, Carrie Lam will then have more robust executive powers.

Argentina may again default on its sovereign debt, but that one’s a broken record.

The UK may leave the EU on Halloween with no deal.

The Fed may (market says 100% chance) cut again in September.

Stock markets could go up just as fast as they could go down.

One point to note – the US two-year yield rebounded last night on the tariff news but the rebound in the ten-year was more muted. The two-ten spread is now dead flat.

Commodities

That spot iron ore price move is a bit misleading, in terms of magnitude of fall, as it represents a catch-up after the holiday in Singapore. The price did not realistically fall -6.6% in a session.

Base metal traders appear circumspect about the tariff news but oil markets loved it.

Gold came off as the US dollar jumped 0.4%, and despite the greenback the China proxy currency jumped 0.7% to US$0.6997.

Today

The SPI Overnight closed up 48 points or 0.7%.

There is a lot for the local market to digest today.

China will release July industrial production, retail sales and fixed asset investment data.

Locally we’ll see the Westpac consumer confidence survey along with the June quarter wage price index.

Earnings reports are due from, among others, Cochlear, Computershare ((CPU)), CSL ((CSL)) and Tabcorp ((TAH)) while National Bank ((NAB)) delivers a quarterly update.

Commonwealth Bank ((CBA)) goes ex-dividend today, as does Suncorp ((SUN)) in the same sector, along with ResMed ((RMD)) and Scentre Group ((SCG)).

The Australian share market over the past thirty days…