Trade policy was the lowlight of the week with rising trade tensions between the US and China culminating in a tit-for-tat saga. The first was a 25% tariff levied against $50bn worth of Chinese imports with China responding the following day with the targeting of $34bn of US imports, including agriculture, for the same level. It escalated further after President Trump instructed the US Trade Representative to find an additional $100bn in goods to be subjected to a 10% tariff unless China backs down on its own tariffs as well as the trade abuses that instigated the tensions initially.

Adding to the fray, the EU announced its own tariffs in response to the US steel and aluminium measures (the original 25% on steel and 10% on aluminium tariffs that came into effect recently) affecting €2.8bn worth of US goods and targeted to hit key Republican seats the hardest. Australia residential property prices were reported by the ABS for the March quarter with confirmation of CoreLogic series in seeing negative annual growth for Sydney.

Australian property overall observed low single digit growth with the weakness in Sydney offset by ongoing strength in the Melbourne market. The Sydney weakness was driven by house prices which saw a decline of 0.8% in the year to March, offsetting a small increase of 0.4% in unit prices. By contrast Melbourne saw growth in both house and unit prices of 6.7% and 4.4% respectively. This is still a notable slowdown as annual price growth in houses and units in Melbourne printed 16.7% and 5.3% respectively as recent as June 2017 showing declining supply of credit by major lenders has bitten the two national market leaders.

The RBA minutes for the May meeting were released this week with a focus being the removal of its statement that the next move in rates would be higher. This goes against the positioning in previous statements and reflects the weakness in both underlying inflation and wage growth in the Australian economy. It may also be a miscommunication as Governor Lowe reiterated the position that the next move would be higher in a speech last week.

The Australian dollar traded at around its lowest level in over a year as trade tensions between the US and China rose this week and investors focused on the diverging interest rate outlook. The AUD also suffered from being a “China play” (given China’s importance as an export target), sinking as investor sentiment on China turned negative. The yen and the US dollar rose on safe haven demand. Base metal demand fell on the trade news as it soured sentiment on global demand for industrial metals. Oil was a major focus ahead of a 22 June meeting between non-OPEC and OPEC producers with speculation of increasing supply weighing on prices this week.

Global equities retreated with exporters down the most in response to the US-China trade war although these concerns abated in the US thanks to the strength of the tech sector with Facebook growing its Instagram offering to over 1bn users. The Australian market rallied last week led by financial stocks with the valuation and dividend differential against the broader market proving attractive to investors. In addition, the Royal Commission is entering its final stages on the banks, lowering negative press. The passage of income tax cuts was also well-received. The main pockets of weakness were in the mining space (led by falling commodity prices) and telecommunications after Telstra’s strategy day was poorly received.

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