Trade tension nerves persist

Trade tensions cause jitters over Asian and Australian currencies


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But RIO thinks steel prices will hold.

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Threatened US tariffs on Chinese imports may test all the Asian currencies and the Australian dollar.

Threatened US tariffs on Chinese imports may test all the Asian currencies and the Australian dollar.

GLOBAL equities were mixed over the past week as US technology stocks came under pressure following weaker earnings reports from heavyweights Facebook and Twitter.

Long-term bond yields were higher in the major markets after the Bank of Japan modified its quantitative easing program to allow 10-year bond yields to climb a little higher than previously.

On currency markets, the Japanese Yen was weaker as a result of the changes to monetary policy and poor economic releases and the Chinese yuan continued to weaken to fresh 12-month lows, while other currencies were more or less flat against the US dollar.

The Australian dollar remains confined to a tight trading range, on paper this would suggest not much has changed, but under the surface there are a couple of dynamics working in opposite directions.

Asia/emerging markets risk sentiment looks a bit better than it did a fortnight ago and commodities are also showing signs of stability.

Against these developments, however, Chinese yuan weakness has remained a thorn in the side for the Australian dollar.

Although commodities were broadly lower in July, the performance in the second half of the month has been more encouraging.

These are early days, but there are signs of stabilisation, partly attributed to a series of China stimulatory measures aimed at offsetting the negative effects from trade tensions with the US.

The market remains very nervous about the potential destabilising effects from a severely weaker Chinese yuan, evident by the pressure on emerging markets and Asian currencies.

Lack of dialogue between the US and China along with the increase in negative rhetoric, point to the risk of trade tensions getting worse before they get better.

The US imposition of 10 per cent tariff on US$200 billion of imports from China, if they take effect early in September, is going to be the big test for Asian/emerging markets currencies and for the Australian dollar.

RIO reported first-half underlying earnings – 4pc below consensus expectations.

The miss was driven mainly by the aluminium and copper and diamonds divisions.

RIO has experienced a significant escalation in input prices for caustic soda, petroleum coke and electrodes, impacting margins.

One-off head office information technology costs have also been incurred relating to increased investment in productivity improvements.

RIO has announced an additional buyback of $1bn of Plc shares, which is targeted to be completed by February next year.

The group has completed disposal of coal assets and expects to complete $845m of aluminium assets this quarter.

The sale proceeds are expected to be returned to the shareholders.

Upon completion of the transcation, management committed to distributing the proceeds to shareholders given current conservative debt levels.

While we expect consensus downgrades, management has taken a conservative approach to cash returns given uncertainty around execution and timing of asset sales.

In particular, the group could sell its interest in Grasberg for $3.5bn (announced last month). Management has committed to further cash returns and expect the dividends to be skewed more towards the second half.

Global macro indicators remain supportive of trade volumes and growth.

RIO management said trade tensions have created uncertainty, but they believe this unlikely to materially impact steel demand.

China supply side reform and environmental policies are driving demand for higher quality raw materials.  

  • This article does not take into account the investment objectives, financial situation or particular needs of any particular person.  Accordingly, before acting on any advice contained in this article, you should assess whether it is appropriate in light of your own financial circumstances or contact your financial adviser. Christopher Hindmarsh is an adviser at JBWere Limited.
  • JBWere Limited is owned by National Australia Bank Limited.
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