A rocky start to the week: The first day of the week’s trade can be reasonably said to have ended – and it was a tumultuous one. US President Trump’s tweeting of new tariffs on the Chinese economy sparked a level volatility not experienced in the financial markets for several months. It certainly had the effect of waking some (perhaps) complacent market participants from their slumber. And although the panic has abated somewhat, sentiment has been dented again this morning, after an announcement from Robert Lighthizer this morning that US tariffs on Chinese goods will be increased this coming Friday.

US trade showed greater equanimity: Wall Street was closed when this information became public. However, during US trade, the S&P500 progressively climbed over night, after gapping considerably at its open. On any other day, one would suggest that the action seen in US equities overnight was negative: the S&P500 is down just shy of 0.5 per cent, with market breadth a lowly 26 per cent. But considering the circumstances, along with lead handed to US traders from Europe and Asia, the price action ought to be viewed with a silver lining. The buyers in the market still seem to outweigh the sellers in the big picture, for now.

Volatility is re-awoken: Volatility has spiked and remains elevated globally. That dynamic may linger for some time yet, too. Arguably, measures of volatility were mispriced anyway, with the VIX trading as low as 11 up until only recently. It’s at 15 now, after lifting above 19 at stages yesterday. The dust will settle this morning in Asia’s trade, despite this morning’s new trade-war developments. So much is being portrayed in futures markets: our ASX200 for one, after shedding 0.82 per cent in rapid fashion in yesterday’s trade, will regain 25 points at today’s open, according to the SPI Futures contract.

Chinese stocks at the forefront: The real interest for macro-watchers today, though, will be how Chinese stocks perform. For reasons that need no explanation, they got whacked in Asian trade yesterday, with the CSI300 sustaining losses close to 6 per cent. The extension of this was an underperformance in risk assets everywhere. It was especially true for the Australian Dollar, which traded at an intraday low of 6963 overnight. Safe havens have naturally prospered in this environment, driving gains in high-grade government bonds, lifting currencies such as the Japanese Yen, US Dollar, and Swiss Franc.

Letting the dust settle: For the discerning punter, today’s trade should reveal far more about the truth of the impact of US President Trump’s policies. The trade-war after all disproportionately impacted Chinese and European equities when trade-tensions were last this high. On top of this, it will be curious to see how participants in Chinese markets, who’d more-or-less priced out an escalation of a trade-war, approach equities. The turnaround in trade overnight (seemingly) came consequent to news that China would still be attending trade negotiations in Washington, with interest now as to whether this news alone is enough to settle bearish sentiment in Chinese markets.

The RBA to seize focus this afternoon: All other news was practically washed out overnight by the reaction to US President Trump’s trade-war Tweets. But today, for Aussie traders, the RBA, at least momentarily, will be the centre of attention. For the first time in several years, market participants approach an RBA meeting with its outcome genuinely unknown. On the one hand, pro-cutters suggest that given the recent poor CPI data, and softer overall economic activity, the RBA should stick strictly to its mandate and cut rates. On the other hand, pro-holders possess a “wait and see view” suggesting more rate-cuts will yield diminishing (and insufficient) returns, anyway.

What are the markets expecting? Interest rate markets are very marginally pointing to a hold decision from the RBA. Around 12 basis points of cuts are baked into the market right now. It’s expected to be a relatively volatile event no matter what: either the RBA cuts, and the market must rapidly price-in the extra 13 basis points of cuts not “in the market”; or they hold, and the market must price-out the 12 basis points of cuts. If the former proves true, the AUD and bond yields will likely tumble, and stocks should get a solid lift; while if the latter proves true, the inverse ought to occur. 

Written by Kyle Rodda - IG Australia