Crude oil plummeted and European and US shares fell on Friday night as markets factored the escalation of the US trade conflict with Mexico. Bond yields continued to tumble as investors shunned growth exposures. The US dollar reversed recent strength as investors connected the dots to slowing North American economies. Despite the pressure Asia Pacific futures markets are only slightly down, with the beginning of a new trading month providing a possible circuit breaker.
A major concern for markets is the pursuit of economic sanctions to prosecute political goals. The threat of increased tariffs unless Mexico curbs unauthorised immigration to the US opens a new front in the global trade dispute. Investors appeared comfortable with the US pursuing better terms of trade with China, accepting short-term pain for longer-term gains. However the economic pay-off in slowing or stopping immigration is a potential drag on the US economy. The lose/lose nature of this latest move could explain the dramatic 5.5% drop in crude oil prices.
Today’s Caixin manufacturing PMI for May could provide evidence of the impact of the trade disputes. Chinese manufacturing is expected to show neither expansion nor contraction, with a consensus forecast at 50.0. Tonight brings the US ISM indices. The forecast is modest expansion, but traders are nervous after data on Friday night showed slowing US inflation.
A packed economic calendar could keep investors on the hop this week. The Reserve Bank of Australia is widely expected to drop the cash rate from 1.5% to 1.25% at tomorrow’s meeting. The combined impact of lower rates and a lower Australian dollar may support local shares. The decision comes ahead of the release of Q1 GDP numbers on Wednesday, where a slowing of growth to an annualised rate of 1.8% could dampen enthusiasm.