The risks that markets have been vulnerable to all week have popped-up in the last twenty-four hours, wiping some of the shine off what has been an otherwise strong performance from global equities. The elephants in the room throughout the week’s trade has been the US-China trade-war, along with the simmering structural problems affecting emerging markets – developments in which had been conspicuously absent. Trade tensions were reinflamed during yesterday’s Asian session and then again overnight, with US President Trump first accusing the Chinese of undermining the process of North Korean de-nuclearization talks, as well as suggesting his administration was ready to power ahead with its proposed tariffs on Chinese goods; while talk of emerging market crises re-emerged last night, after the Argentine Peso collapsed even despite that country’s central bank hiking interest rates to 60 per cent.

Wall Street: The heightened geopolitical and macroeconomic risks clipped the wings of Wall Street’s record run, culminating in a day which saw the industrial-heavy Dow Jones shed around 0.5 per cent, and the benchmark S&P500 sustain losses just shy of that. The activity in North American markets sets-up a weak finish to the month of August, during which US shares have clocked gains of about 3.5%. Arguably, the pull back in US equities markets is rather necessary, given that this recent run higher has looked overstretched over the past several days. The outlook for US shares remains very strong leading into perhaps the most active part of the financial year, however it must be said the naysayers are growing somewhat louder as international macroeconomic concerns become more prevalent.

US macro fundamentals: Though the night was defined by the return to headlines of trade-wars, emerging market chaos and the consequent impact on US indices, a couple of crucial fundamental data releases for the US economy were released overnight. The most significant was the printing of the US Federal Reserve’s preferred gauge of inflation: the monthly Core PCE Price Index. The data revealed that on an annualized basis, US inflation returned to the Fed’s 2 per cent target last month, following a modest dip in the prior month’s figures. Despite the positive read, the data failed to move the dial in interest rate, bond, or currency markets, with those asset classes influenced far more by last night’s trade-war concerns and emerging market troubles. The conundrum remains what ability the US Fed will have to continue its rate hiking path into 2019, as interest rate traders maintain doubt about global fundamentals leading into the new year. 

China: China’s financial markets will be scrutinized by traders today, considering the renewed hostilities overnight in the US-China trade war. Investor sentiment towards China’s markets had improved throughout the week, following Chinese policy makers assurances of supporting the economy and financial markets. Notwithstanding this, Chinese indices continue to fail to mount a serious recovery, as traders stick to their strategy of selling the rallies. The Yuan has also given up ground on its recovery, slipping back to 6.86 and towards the key 6.90 mark, as risk appetite dries-up amid worries of the potential impacts of US President Trump’s proposed $US200bn worth of tariffs on the Chinese economy. In the day ahead, traders will keeping abreast of official PMI figures coming out of China, to glean updated insights into whether the Chinese economy is showing further signs of faltering.

ASX: SPI futures have turned as the US markets ended, now pointing to a 12-point jump for the ASX200 at the open. This comes following a flat day for Australian shares, which was propped up on lower volumes and slim breadth, by strong activity in the telecommunications sector, after the announced merger between TPG Telecom and Vodafone. TPG rallied 18 per cent on the news, a dynamic that also dragged the share price of Telstra up almost 3 per cent, as investors welcomed the prospect of a shake up within the stagnant telco space. The day ahead for the ASX200 may well be dictated by how another rise in oil prices and some commodities overnight supports materials and energy stocks, against what may well be a sluggish day in broader Asian markets.

Capex and Building Approvals: The health of the broader Australian economy was under the spotlight yesterday. Market participants were geared-up to peruse the latest quarterly Capital Expenditure figures, coupled with the monthly release of Building Approvals data. To the asssued displeasure of policymakers and Aussie economy bulls, both data releases greatly underwhelmed expectations, with “Capex” figures (in particular) a big disappointment. Capital Expenditure was showed to have contracted by 2.5 per cent last quarter, versus a forecast of 0.6 per cent, revealing that the infrastructure boom that has carried the domestic economy in recent years is slowing more considerably than previously thought. The news compounded the bearishness elicited by the day prior’s news of an out of cycle mortgage rate hike from Westpac, pushing expectations for an interest rate hike from the RBA by early 2020 to a less than 50 per cent chance.

Next week: The end of this week will end with anticipation and preparation for what shapes to be a significant week next week for both domestic and international financial markets. On the domestic calendar, the action will begin Monday, with the release of local retail sales figures, before focus shifts to the RBA’s meeting on Tuesday, and the quarterly release of Australian GDP figures on Wednesday. From a global perspective, the week will be broadly defined by US Non-Farm payrolls data on Friday night – an important precursor to next month’s US Federal Reserve meeting – as well as a swathe of PMI data, and a meeting between the Bank of Canada. On the back of a week where data has been light and markets have traded predominantly on sentiment, the action next week may reveal whether the gains in global indices are justified, and whether the heightened risk appetite can persist.      

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