8@eight: ASX set for negative start to day

3. ASX set to slide: Monday’s climb was the best day of trading for the ASX since May 3 when the index climbed 0.8%. However, the encouraging data recently could in turn lead the RBA to adopt a less accommodative stance, leaving investors cautious. On Tuesday, futures are pointing to a 24-point drop at the open.

4. An update on trade wars: This past week the US re-ignited trade wars when its announced that it was moving ahead with the steel and aluminum tariffs it had initially floated in March against the European Union, Canada and Mexico. Since then, each of those countries directly in the line of the global leader’s sites have announced their intentions to retaliate along and some have even given the specifics.

Over the weekend, the meeting of G-7 finance ministers and central bank heads rendered its own collective rebuke against US Treasury Secretary Steve Mnuchin. However, there wasn’t an official statement to come from the six other members of the group to indicate their collective dissatisfaction. That will likely come from the leaders who are scheduled to meet this coming Friday and Saturday. The relatively sanguine bearing for the markets to start off this week gives off an air that this conundrum simply isn’t important. More likely, it is just more complex than standard drivers of late, there is reticence to take a stance ahead of the Summit and there is perhaps lingering hope that this will be another situation whereby the US President suddenly reverses his position.

5, Fed rate forecasts are dependent on risk trends, not the other way around: With the Dollar’s recovery the past few months, FX traders have had to find a foundation for this renewed confidence if they were to reasonably project its continued gains. One of the leading explanations adopted followed a familiar line of logic: interest rate expectations are more favorable for the US and now the Dollar is looking to catch up to that implied yield differential. As far as fundamental motivations go, this is a sound one.

However, the assumption that it is suddenly more important – particularly amid a rise of speculative uncertainty whereby low yield is not particularly attractive – remains dubious. Regardless, if this is the motivation for the Dollar, currency traders should keep in mind that the interest rate forecasts for the US have eased materially over the past few weeks amid concern over growth, financial market vibrancy and trade war fallout. If full-tilt risk aversion kicks in, we have something else to guide the USD higher; but rate forecasting alone is a questionable guide moving forward.

6. Australian dollar Monday’s best performing major currency: Once again, the Australian Dollar was the top performer amongst the most liquid currencies Monday. It seems to win this designation frequently, though we have not registered the kind of significant performance over time that it would entail. From these wide gains to start the week, we already know not to immediately assume a more prolific trend is already underway. This past session, the charge was funded through an active economic calendar.

First quarter corporate profit soundly bested expecations to warm growth and income forecasts. That data carries far more heft than the retail sales and inflation reading from the Melbourne Institute, both of which also improved. With the RBA decision dead ahead, however, any long-dated growth enthusiasm could be quickly upended. The same is also true of GDP on Wednesday. In short, don’t position for any trends until we get out of the fundamental weeds.

7. Commodities appear set for a tricky June: Despite posting gains in May, commodities like crude oil and precious metals may have a difficult month ahead if the past two trading days are any indication. Markets are naturally focused on global trade tensions that could disrupt order flow of steel and aluminum as US President Trump continues to stoke the fires of trade wars. China pushed back saying any progress made previously through negotiations could be undone by the pressure. Trade tensions are giving a short-term premium to base metals as aluminum has climbed higher for the third day on the LME. For oil, the biggest concern is the growing rumors that OPEC can no longer hold back production. WTI crude oil broke below the 100-DMA in overnight trade for the first time since September and further sliding below $65/bbl for the first time in two months.

8. Market watch:

SPI futures down 24 points or 0.4% to 6002 at about 6.45am AEST

AUD +1.1% to 76.47 US cents (Overnight peak 76.66)

On Wall St: Dow +0.7%, S&P 500 +0.5%, Nasdaq +0.7%

In New York, BHP -0.1% Rio +0.2%, Atlassian +0.6%

In Europe: Stoxx 50 +0.5%, FTSE +0.5%, CAC +0.1%, DAX +0.4%

Spot gold -0.1% to $US1292.81 an ounce at 3.06pm New York time

Brent crude -1.9% to $US75.34 a barrel

US oil -1.4% to $US64.86 a barrel

Iron ore -1% to to $US65.47 a tonne

Dalian iron ore +0.9% to 463 yuan

LME aluminium +0.4% to $US2314 a tonne

LME copper +1.1% to $US6975 a tonne

2-year yield: US 2.50%, Australia 2.04%

5-year yield: US 2.78%, Australia 2.38%

10-year bond yield: US 2.94%, Australia 2.73%, Italy 2.50%, Spain 1.31%

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

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