Market Briefing: Art of the deal or capitulation?
US blinks. US announced 90-day pause of higher 'reciprocal' tariffs, except for China. A positive market jolt. Equities surged & AUD outperformed.
Market driver. Signs of dysfunction in the US bond market was a factor. Investors may have started to lose confidence. USD negative medium-term.
Macro trends. RBNZ cut rates by another 25bps yesterday. US CPI inflation out tonight. RBA Governor Bullock is also speaking.
Global Trends
The craziness and extreme volatility in markets has continued, though overnight the mood swung sharply in a more positive direction. Hours after the ‘Liberation Day’ tariffs came into effect, President Trump announced a 90-day ‘pause’ of ‘higher reciprocal’ duties for “non-retaliating nations” with the “baseline” levy of 10% now applied broadly. China is still an exception with tariffs on goods it ships to the US increased again (from 104% to 125%) after it had announced goods sent across by the US will now have an 84% tariff (up from 34%).
While the US Administration is trying to spin developments as President Trump employing “the art of the deal” the reality looks to be that a loss of market confidence forced their hand after signs of dysfunction emerged in the US bond market (especially at the long end of the curve). As President Trump acknowledged people were “getting a little bit yippy, a little bit afraid” with the sharp rise in bond yields over recent days clearly on the radar as it suggested investors may be losing confidence. The US 30yr yield breached ~5% yesterday, a 60bp increase since the start of the week. The rapid ascent and high yield levels are a pain point for government finances and interest rates in the US real economy.
After the recent torrid spell, the dramatic news generated a sizeable U-turn in risk-sensitive assets. US equities rebounded strongly with the S&P500 rising 9.5% and the tech-focused NASDAQ jumping ~12.2%. In percentage terms this is the largest one-day rise in the S&P500 since October 2008, although after the relentless selling that has taken place it only puts the index back where it was a week ago. Less nervousness about global growth also saw commodity prices lift with WTI crude oil (+7.5%) and copper (+8.7%) up strongly. In FX, the reversal of fortunes saw growth-linked currencies such as the NZD (+2.2% to ~$0.5648) and particularly the AUD, which we had thought was unduly beaten up, outperform (+3.4% to ~$0.6155). The USD index, is on net, little changed with EUR a touch lower (now ~$1.0953) and USD/JPY a bit firmer (now ~147.47). Bond yields were also whipped around. The paring back of US Fed rate cut expectations saw the 2yr rate lift (+18bps to ~3.91%), while long-end rates drifted back from their intra-day peak as confidence returned.
US CPI is due tonight (10:30pm AEST) and indicators point to a moderation in annual inflation. If realised, we think this will further sooth markets and see the USD remain on the backfoot. More broadly, we believe the repeated changes in the US’ tariff stance might have shaken investor confidence in the Administration’s ability to implement policy. This, and the economic impacts from still higher import costs and lingering uncertainty should see the USD trend lower over the medium-term, in our view.
Global event radar: US CPI (Tonight), BoC Meeting (16th Apr), ECB Meeting (17th Apr)
Trans-Tasman Zone
News the US’ ‘reciprocal’ tariffs will be ‘paused’ for 90-days (outside of China which has seen the levy on goods it ships across increased further) is a welcome reprieve for the global economy (see above). The dramatic turnaround has generated a positive jolt for growth-linked cyclical assets such as equities and commodities, with the optimism a support for the NZD (+2.2% to ~$0.5648) and especially the AUD (+3.4% to ~$0.6155). The backdrop also helped the AUD outperform on the crosses with sizeable rebounds coming through. AUD/EUR (now ~0.5621), AUD/GBP (now ~0.4802) and AUD/JPY (now ~90.76) have risen by ~3.0-4.2%. There were also increases in AUD/NZD (+1.3% to ~1.0898), AUD/CAD (+2.1% to ~0.8670), and AUD/CNH (+2.4% to ~4.5221).
As discussed over the past few days, we thought the “shoot first, ask questions later” market mindset had seen participants too quickly factor in something more sinister than what was unfolding and that the AUD has been unduly punished (see Market Musings: Global risks don't equate to a crisis). It always appears darkest before the dawn. The backtracking by the US Administration overnight shows that real world and market pain points were being reached. As mentioned above, we believe the USD should trend lower over the medium-term. Reduced confidence in the US Administration’s ability to effectively implement policy, coupled with headwinds to US economic activity stemming from (still) higher import costs and lingering uncertainty are underlying USD headwinds, in our view.
More bursts of volatility should be anticipated near-term given the fast-moving environment, but on balance even after the overnight resurgence we think there is more upside potential for the AUD over the medium-term. In contrast to the outlook for the US the fundamentals in the Australian economy, particularly the labour market, remain on solid footing. And as mentioned previously, Australia’s direct trade exposure with the US is minimal (only ~4% of exports are sent to the US) while any pain in China’s export sector is likely to be counteracted by steps to stimulate domestic activity. This is where Australia’s key exports are plugged into. The AUD also has valuation support with it still tracking a few cents below the average of our suite of ‘fair value’ models even after accounting for the market swings.
AUD & NZD event radar: US CPI (Tonight), BoC Meeting (16th Apr), NZ CPI (17th Apr), AU Jobs (17th Apr), ECB Meeting (17th Apr)
AUD levels to watch (support / resistance): 0.6080, 0.6110 / 0.6200, 0.6260
NZD levels to watch (support / resistance): 0.5550, 0.5600 / 0.5695, 0.5730
Market Moves
Peter Dragicevich
Currency Strategist - APAC
Upcoming Events
THURSDAY (10th April) CNY CPI/PPI Inflation (Mar) (11:30am) AUD RBA Gov. Bullock Speaks (8pm) USD CPI Inflation (Mar) (10:30pm) USD Initial Jobless Claims (10:30pm) GBP BoE’s Breeden Speaks (11pm) USD Fed’s Logan Speaks (11:30pm)
FRIDAY (11th April) USD Fed's Schmid Speaks (12am) USD Fed’s Goolsbee & Harker Speak (2am) GBP GDP – Monthly (Feb) (4pm) EUR ECB Pres. Lagarde Speaks (7:45pm) USD PPI Inflation (Mar) (10:30pm)
SATURDAY (12th April) USD Fed’s Musalem Speaks (12am) USD Uni. of Michigan Sentiment (Apr P) (12am) USD Fed’s Williams Speaks (1am)
*Note, all times/dates provided are AEST
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