The initial panic moves have eased back — AUD/JPY now just -2.1% after earlier touching -7.1%, Aussie 10Y yields down 15bps to 2.14% versus intraday nadir 2.04%. But the climate of fear remains. Weak PMIs, falling South Korean exports and now Apple’s China-induced woes all feed into the narrative that the trade wars are weakening Asia in particular and global output in general.
This speaks to my own concern that I’ve stated herein multiple times over the past several months; most recently in Part 2 of our 2018 letter:
….if the trade war makes its way too far into the not too distant future (which, thankfully!, would be a political nightmare [read incentive] for the players), I suspect that we’ll ultimately be staring down some ugly looking charts and a negative score for our index: A scenario that will have us committedly moving to a defensive posture within client portfolios sooner, alas, than we otherwise would have.
My “good news” commentary in that same letter remains, for now, our base case:
“The good news is it’s probably not too late (but I fear we’re getting close) to do an abrupt about face (trade war truce) and see equity markets reflect a continuation of what was at the beginning of this year a globally synchronized, robust, economic expansion — although we should doubt, given the damage already done, whether “globally synchronized” and “robust” will be apt descriptions going forward.”
Oddly, despite Australia’s huge correlation to China, the ASX 200 Stock Index is up 1+% this evening (as I type). My next stop with regard to Australia correlations is the commodities market, specifically copper; and while the metal tanked immediately on the Apple/China news (after hours Tim Cook forecast a markedly lower than expected revenue number for the last quarter, largely on weakness in China), it’s roaring back as I type…
While I can speculate as to what might be inspiring a rally in Australian stocks this evening (could simply be copper), it’s a tougher call on copper. My best guess is that either China has announced new stimulus, or perhaps copper traders are taking President Trump’s early comment regarding getting the “trade deal fixed” to heart. Time will tell…