July 2018 was a month of two halves. Global market sentiment was split between the trade war concerns and the tech sector rebound.
Starting with the happier rounds, Apple’s (AAPL US) valuation crossed the line of the first US$1 trillion US company, lifting NASDAQ index towards record levels. Amazon (AMZN US) is only 10% behind and is looking likely to join in the party shortly. Back home, we had something of our own momentum tech rally. Afterpay Touch (APT AU) reached the A$3 billion market cap valuation, with an estimated P/E of 220 times on Bloomberg consensus estimates. Not bad for a company launched in 2015!
Unfortunately, the news was less joyful on the global trade front. The US implemented 25% and 10% import tariffs on steel and aluminium imports on the grounds of national security. There were a few exemptions on the list of countries, such as Australia, Brazil, South Korea, and the EU. But the negative headlines of protectionism ignited plenty of volatility throughout asset markets around the globe.
With $34 billion worth of Chinese direct imports to the US being charged the full 25% duty, the tension was then uplifted between the two biggest economies in the world. The Chinese stock market retraced almost 3% during the month, and the Chinese currency fell to levels not seen since the end of 2017.
There was plenty of equity market related activity back home. A steady S&P/ASX 200 (up 1.3% for the month) overshadowed many domestic headlines across industries. Major city property prices as a whole retraced for the first time in six years, with Melbourne leading the statistics from tighter credit availability. Federal Treasurer Scott Morison promised voters a “New Banking Era” following daily adverse headlines out of the banking royal commission.
The fixed income world experienced its share of action. China’s PBoC stimulated the economy with both fiscal tax cuts and easing monetary liquidity for lending. The Bank of Japan had to intervene aggressively to maintain yield stability as the decade long Quantitative and Qualitative Easing (QQE) program comes to an end. And, in the US, the treasury yield curve flattened out to levels not seen since the beginning of the GFC over a decade ago. There is now only 25 basis points of interest rate premium for the US government to borrow money for 10 years versus borrowing for 2 years.
Source: Pitcher Partners Research
All in all, the trade tension is expected to intensify in August, with the US threatening China with anywhere up to US$500 billion worth of tariffs on bilateral trading products. Retaliation from the middle kingdom as far has been on a tit-for-tat basis ($34 billion worth of US commodities and other imports), on top of the depreciation of its currency. Other areas we are watching include the verbal intervention from US President Trump over his displeasure from continue FED hikes, and the manipulation of the currency for trade advantage, out of both Asia and Europe. There are also some clouds appearing over the improved economic updates out of the IMF economics team.