Research Team, 9 March 2018

The rollercoaster ride has continued for investors this week, as trade becomes a key topic of conversation. Geo-political uncertainty remains front of mind for investors while the end of the local reporting season means there has been little to drive markets closer to home.

US President Donald Trump’s proposed trade tariffs on steel and aluminium imports to the US sent markets into a spin this week. Investors feared that this could be the start of a trade war or the first of other protectionist policy announcements. Adding to the cautionary stance was the resignation of the US Chief Economic Advisor Gary Cohn. It is rumoured that Cohn has resigned over the proposed trade policies as he is a free trade advocate and disagrees with the President’s moves to implement protectionist policy. Cohn has been a strong supporter of the business friendly initiatives that have been implemented so far during Trump’s tenure and was a key driver of the tax changes, thus his departure is seen as a blow to big business in the US.

Political uncertainty in Europe continues although to a lesser extent now that Germany has been able to form a government six months after its election. The breakthrough came early this week, after members of the Social Democrat (SPD) party voted in favour of forming a coalition with Angela Merkel’s Christian Democratic Union Party. This will be Merkel’s fourth term as Chancellor and should she complete the four years, she will equal Helmut Kohl’s record setting term.

The Italian election has been on our watchlist for some time now, as the populist movement in the nation gains in popularity. Italy is a hot spot for discontent with the European Union, and this sentiment saw the Eurosceptic, anti-establishment and anti-immigration parties garner more than 50% of the votes. Interestingly, voter turnout for the election was very low at 73% despite the hotly contested issues.

No party received enough votes to form a government, with the Five Star Movement getting the highest percentage, with 33% of the vote. The Centre-right coalition has 37% of the vote, and there is talks that they will approach President Sergio Mattarella to form a government, which could see Matteo Salvini made Prime Minister. In Italy, to form a government a party or coalition needs to have 40% of the vote. Either of these parties coming to power will likely see a large amount of pressure placed on the European Union so we will continue to watch the situation closely.

The latest Global Dairy Trade auction saw its second decline in a row, slipping 0.6%. The key driver behind the decline was the fall in the price of whole milk powder, down 0.8%. Of note was the strong rise in skim milk powder, up 5.5%. Fonterra’s forecast farmgate milk price for the current season remains at $6.40 and this is largely in line with the Agri HQ estimate.

The Reserve Bank of Australia met this week, and kept prices on hold for the 19th meeting in a row at 1.50%. The central bank acknowledged that global growth is picking up and expects the Australian economy to grow faster in 2018 than it did last year. It also expects inflation to remain low but sees it picking up as the labour market continues to tighten and the economy continues to strengthen, albeit gradually. The RBA judged that it would keep monetary policy loose to support further economic progress.

Fourth quarter GDP from Australia was released later in the week and came in below expectations. For the December quarter, growth slowed to 0.4% from 0.7% in the September quarter. This was below expectations for 0.6% growth. The annualised growth rate for 2017 was 2.4%, and was also below expectations and the previous quarter’s growth of 2.5% and 2.8% respectively.

In China, the National People’s Congress has been held this week. At the congress, a growth target of 6.5% was set for the year. This was unchanged from 2017. According to premier Li Keqiang, this will enable China to achieve full employment and maintain inflation at around 3%.