Globally, markets driven by geopolitics – Westpac

Sean Callow, Research Analyst at Westpac, explains that economics has very much taken a back seat over the past week as the US missile strike on a Syrian airbase was not a complete surprise given official comments after the sarin gas attack but the timing seemed early, especially as it came in the middle of the Trump-Xi meeting in Florida.

Key Quotes

“The market response was classic risk aversion: a fall in USD/JPY and AUD/USD, weaker equities and a flight to US treasuries.”

“These initial moves were not extended very far, with the clear impression that there was no plan to follow up with further military action. But USD/JPY in particular stayed heavy as attention quickly swung to another geopolitical hotspot, the Korean peninsula. Mid-April was always likely to be a tense time for the region, with the annual South Korea-US military drills overlapping with North Korea’s holidays for founding father Kim Il-Sung’s birthday (15-16 April).”

“So a symbolic missile launch or two into the Sea of Japan was always likely. But tensions rose much further as President Trump ordered an aircraft carrier group that had planned to sail from Singapore to Sydney to instead head for Korean waters. Given the bipartisan support for Trump’s strikes on Syria, it was not entirely irrational to wonder whether the US Navy would again be ordered into action.”

“China to the rescue? Trump told the WSJ that “after listening for 10 minutes” to Xi, he realized that China had less influence over Pyongyang than he had thought. Subsequent calls from China for dialogue may help defuse tensions in the week ahead.”

“But the US dollar seems likely to remain on the back foot, after a week in which it fell against all majors except KRW. Trump declared USD to be “getting too strong”, but more fundamentally, waning confidence over tax reform and infrastructure spending have sent the 10 year Treasury note to 2.23%, a low since 17 November and a hefty 40 basis points from the post-election highs.”