Home World Business 8@eight: Wall Street up as geopolitical tensions hover

8@eight: Wall Street up as geopolitical tensions hover

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Local shares are due to open slightly higher after Wall Street resumed trade with a turnaround session, finishing in positive territory to snap a three-day losing streak. 

1. North Korea: It seems the focus is now firmly on future missile tests from North Korea and whether any future tests will actually be successful. From here, it would all be down to Mr Trump and his allies and what their reaction would be, but we can believe that markets will not take kindly to this. For now, though the focus has been on the prospects for talks, potentially incorporating China more into any negotiations. Mike Pence has given a fairly blunt assessment of the situation in a New York Times article detailing “Trump essentially has three choices: a military strike that could ignite a full-blown war; pressure on China to impose tougher sanctions to persuade the North to change course, an approach that failed for his predecessors; or a deal that could require significant concessions, with no guarantee that North Korea would fulfil its promise.” One suspects the concerns in North Korea has further to play out, especially when we see headlines of “North Korea UN envoy Kim warns of risk of nuclear war”. With this in mind, there will be a strong focus on next week’s meeting between the Russians, the US and the United Nations to discuss Syria and North Korea, although a week seems a long time for markets and as mentioned there is a concern of further missile testing in the near-term.

Market watchers are anxiously waiting to see what the US response is to North Korea's actions over the weekend. Market watchers are anxiously waiting to see what the US response is to North Korea’s actions over the weekend. Photo: Evan Vucci

2. ASX: The reaction on Asia open yesterday was to predictably sell risk and we saw S&P 500 futures down close to 1% at one stage, with the US ten-year Treasury as low as 2.19% and USD/JPY trading down to ¥108.13. However, as we entered the later stages of European trade there has been some covering of these bearish trades and we have been left with somewhat of a flat lead for the ASX 200.

3. US: Perhaps the view that there is the potential for open dialogue has been the key here and we have seen USD/JPY heading back to ¥109, with the ten-year treasury pushing back to 2.24%. ‘Real’ (or inflation-adjusted) yields have reserved strongly and this has been the key reasoning why gold has sold off from $US1295 to currently sit at $US1284 – to stand largely unchanged from the ASX 200 close on Thursday. US equities have performed admirably in the face of angst towards the situation in North Korea, helped by a strong rally in US banks, tech and consumer discretionary names, with 94% of stocks higher on the day. With SPI futures closed on Friday and Monday, perhaps one way to conceptualise the open is the fact S&P 500 futures are trading at similar levels as we closed on Thursday. So this seems like the best lead.

4. Iron ore: Another aspect of note were some fairly punchy falls in bulk commodity futures, with iron ore and steel futures (traded on the Dalian exchanges in China) falling 2.5% and 1.3% respectively. Spot iron ore has closed down 3.5%. BHP’s American Depository Receipt (ADR) closed down 1.7% if we use this as a proxy for all things mining.

5. Aussie dollar: AUD/USD hasn’t really followed the moves in iron ore, trading to $US0.7600, although we are seeing better selling coming into the pair here.

6. China growth: For those who missed, China released solid growth numbers yesterday, with Q1 GDP increasing 6.9% and giving authorities’ increased breathing room to archive the “around 6.5%” growth target. Chinese data in Q1 has been positive in general through both the official and private surveys and this has come amid a modest tightening of financial conditions. The wash-up though we are left with, is that Chinese traders are sensing tighter liquidity through the increased costs of borrowing from the central bank for short and medium-term loans. Traders are expecting tighter monetary policy and further changes through its macro-policy assessment. The interesting reaction was seen in the Chinese equity market, where the CSI 300 fell 0.7% on the data. So we can deduce that good news in China is now taken firmly as bad news by markets, on the idea of tighter financial conditions. I prospect that we have seen peak positive growth in China is in play and the growth rate should gradually move lower from here.  I would caution against becoming too concerned though, especially ahead of the leadership change later in the year, as it seems highly likely authorities will want to see a strong economy and financial markets as we roll into that situation.

7. Week ahead: So the wash-up is we start the week on a flat note, although it could have been more negative affair given what was shaping up yesterday. It promises though to be an interesting week, especially with such heightened concerns at a geopolitical level, 17% of the S&P 500’s market capitalisation reporting and the final stages of the French elections.  

8. Market watch: 

SPI up 9 points to 5861

AUD +0.2% to 75.87 US cents (Overnight range: 75.65 – 76.11)

On Wall St, Dow +0.9%, S&P 500 +0.9%, Nasdaq +0.9%

In New York, BHP +0.4%, Rio +0.1%

Most European markets were closed for the Easter holiday

Spot gold +0.3% to $USUS1289.75 an ounce

Brent crude -0.7% to $USUS55.52 a barrel

Iron ore (Metal Bulletin) -3.5% to $USUS66.25 a tonne

Dalian iron ore -2.6% to 488 yuan

The LME was closed for the Easter holiday

Copper +1% to $USUS259.60 a pound in New York 

10-year bond yield: US 2.23%, Germany 0.18%, Australia 2.47%

Description  This column was produced in commercial partnership
   between Fairfax Media and IG

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