Market Briefing: Ongoing tariff risk
Have a look at the latest edition of our Event Radar & Views In A Nutshell pack
Tariff news. Threats of more tit-for-tat tariff moves between the US & EU unnerved markets. Equities & bond yields fell. AUD & NZD dip.
More vol. S&P500 now in "correction" territory. More vol. likely as 2 April approaches. This is when the US will announce 'reciprocal' tariffs.
Macro events. A busy week ahead macro wise. China data (Mon), BoJ (Weds), US Fed, AU jobs report, NZ GDP, & BoE (all Thurs) on the schedule.
Global Trends
Yesterday’s improvement in sentiment failed to take hold with another bout of tariff-related risk aversion washing through overnight. Trade tensions remain elevated and the tit-for-tat moves are unnerving markets. In response to the EU’s plans to counterpunch US tariffs on steel and aluminium by imposing targeted tariffs on a range of US products produced in Republican states such as American whiskey and Harley Davidsons President Trump threatened to impose a 200% duty on wine, champagne, and other alcohol from France and wider EU. According to President Trump the EU is “very nasty” and the US won’t be “ripped off anymore”. Adding to the negative tone were reduced odds of a near-term ceasefire in Ukraine after Russia President Putin stopped short of endorsing the idea. The risk of a US Government shutdown kicking off over the weekend also ticked up after the Senate Democrat leader stated they will block a key Republican spending bill.
The backdrop weighed on equities with the 1.4% fall in the US S&P500 pushing the index ~10% from its February peak and into “correction territory” for the first time since late-2023. The “magnificent 7” tech stocks which have driven the broader US stockmarkets outperformance over the past few years remain under pressure. This group is now ~20% from its post US election highs. Bond yields lost altitude with US rates falling ~3-4bps across the curve. The benchmark US 10yr yield is below its 1-year average (now 4.27%). In FX, the USD index edged a little higher with EUR slipping back (now ~$1.0850) after its recent strong run. The shaky risk vibes supported the JPY (USD/JPY dipped under ~148), and cyclical currencies such as the NZD (now ~$0.5699) and AUD (now ~$0.6284) retraced yesterday’s modest gains.
As discussed before, we believe further headline driven bursts of market volatility should be anticipated over the period ahead, particularly as 2 April approaches. This is when the US will make its wide-ranging “reciprocal tariff” announcements. We think the EU could be in the US’ line of fire given ~20% of US imports come from the region and EU nations have high VAT/GST rates. This is something the Trump Administration thinks creates an unfair advantage as exporters to the US receive a rebate when products cross national borders while US imports are taxed because VAT/GST is charged when items are purchased. While we believe the USD should lose ground over the longer-term, the tricky geopolitical terrain may generate intermittent bouts of USD supportive volatility over coming weeks.
Global event radar: China Data (17th Mar), US Retail Sales (17th Mar), BoJ Meeting (19th Mar), US Fed Meeting (20th Mar), BoE Meeting (20th Mar)
Trans-Tasman Zone
The bout of market turbulence overnight on the back of US-led global trade tensions exerted a little downward pressure on cyclical assets like US equities, the NZD, and the AUD (see above). The pull-back in the AUD (now ~$0.6284) and NZD (now ~$0.5699) has seen both retrace yesterday’s modest gains. The AUD also gave back ground on the crosses with the shaky risk sentiment making AUD/JPY the largest mover over the past 24hrs (-0.9%, now ~92.90). The AUD weakened by ~0.1-0.5% against the EUR, GBP, CAD, and CNH. As a result, AUD/EUR (now ~0.5790) is near the bottom of its multi-year range, while AUD/GBP (now ~0.4853) is at levels last traded in March 2020.
As outlined previously and discussed above, more short-term bursts of AUD and market volatility are likely over the period ahead as global economic and market ructions play out, particularly as 2 April approaches. This is when the US is set to make its broader ‘reciprocal tariff’ announcements. Volatility in the AUD isn't unusual. As a reminder, since the late-1980’s the AUD has, on average, traded in a ~1% daily range. In addition to the US tariff developments there are a few other important macro events on the horizon that may see the AUD swing around. In Australia, the monthly jobs report is due next Thursday, a few hours after the US Federal Reserve holds its policy meeting. The Bank of Japan holds court next Wednesday and the monthly China activity data is released on Monday.
That said, from a medium-term perspective we still think there are uneven risks for the AUD around current levels (i.e. there is more upside than sustained downside potential). In our opinion, a decent amount of negativity already looks baked in with the AUD tracking ~3-4 cents below our ‘fair value’ models. The AUD has also not traded much below where it is over the past decade (AUD has been sub-$0.63 less than ~3% of the time since 2015). The important structural underlying dynamics that have cushioned the AUD down around current levels (i.e. Australia’s improved capital flow trends and higher terms of trade) remain in place. Moreover, as mentioned before, we think any tariff induced export pain in China is likely to be offset via measures aimed at boosting commodity-intensive infrastructure investment. This should be AUD supportive given this is where Australia’s key exports are plugged into. Australia is also in a relatively favourable position tariff-wise due to its minimal direct trade relationship with the US and as it is one of the few nations the US runs a trade surplus with (i.e. US exports more to Australia than it imports from Australia).
AUD & NZD event radar: China Data (17th Mar), US Retail Sales (17th Mar), BoJ Meeting (19th Mar), US Fed Meeting (20th Mar), NZ GDP (20th Mar), AU Jobs (20th Mar), BoE Meeting (20th Mar)
AUD levels to watch (support / resistance): 0.6220, 0.6260 / 0.6330, 0.6360
NZD levels to watch (support / resistance): 0.5630, 0.5660 / 0.5750, 0.5800
Market Moves
Peter Dragicevich
Currency Strategist - APAC
Upcoming Events
FRIDAY (14th March)
GBP GDP – Monthly (Jan) (6pm)
EUR ECB's Escriva Speaks (8pm)
SATURDAY (15th March)
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