Daily Market Report 07.05.2019
07 May

Daily Market Report 07.05.2019

Just when the trade talks between the U.S. and China were coming close to a deal, things have taken a negative turn with President Trump stating that he will increase tariffs to 25% due to China backtracking from substantial previous commitments hitting global markets that were expecting a resolution. Talks will nevertheless continue with Vice Premier Liu He visiting Washington this week. 

The Turkish election board has ruled the Istanbul elections as invalid, giving a boost to President Erdogan but hitting the Turkish Lira hard amid calls of a “dictatorship” state establishing in the Balkan country from the Republican opposition party who had narrowly won the election in Turkey’s largest city after 25 years. Erdogan himself rose to power as Istanbul city mayor in the 90’s. The Turkish lira weakened over 10% to 6.1075 against the dollar following the re-election decision. Inflation in the country is nearly 20% and unemployment close to 15% while tensions with the U.S. over a purchase of a Russian missile defence system might trigger U.S. sanctions. 

BMW profit fell 78% in the first quarter as the car maker took a hit following higher investment spending and a 1.4bn euros legal provision.  A disappointing first quarter was also seen for Henkel, the German consumer goods company hit by falling industrial production and underperformance in China and western Europe.  The makers of Scharzkopf and Persil saw its earnings per share dropping 6% to 1.34 euros falling behind its Unilever and Procter&Gamble competitors. But it's not all bad news in European earnings season with French transport infrastructure group Alstom posting a 44% increase in its before tax earnings.

The RBA announced that it will be keeping interest rates unchanged. This morning, although retail sales numbers held up, ex-inflation retail sales were disappointing despite a very low inflation print, suggesting that the economy is still not rosy. With underlying inflation falling sharply in Q1 2019, the risk of a rate cut by the RBA in the future is nevertheless still likely. As previously indicated by the RBA, they will look to resolve the ongoing conundrum between weaker GDP growth and robust labour market, and labour data will be key going forward. If unemployment data worsen, the odds of rate reduction will drastically increase. At present, the case for a rate cut is growing due to global economic easing, and that it could take place over the next few months. The recent weak inflation data has also boosted bets on lower interest rates. As the 2nd April RBA meeting minutes clearly indicated that the RBA was willing to cut the cash rate if necessary and have set out the conditions that need to be fulfilled for a cut to occur, the muted inflation number could act as a trigger. Thus, more weakness lies ahead for the AUD, due to a more dovish stance expected from the RBA going forward.

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