The Week Ahead and in Review: Oct 21

Last week, it was suggested that the partial trade agreement reached between the US and China was unlikely to yield a discernible impact on Australian financial markets. Despite opening on Monday slightly lower, the ASX All Ords index recovered within the day to return to prior levels. This indifference to the news is representative of the sensationalised nature of the trade war; the tariffed goods in question have little to no bearing on Australian goods and services.  Furthermore, many of the products have both inelastic demand and complicated production processes (such as electronics and technology), which means that China would still be a first-pick importer in the short- to mid-term.

A more genuine risk presented to Australia by this trade war is a potential fall in aggregate demand from China, driven by being closed out of the American economy. When you look past Trump’s loud noises and vague rhetoric, it’s clear that such an event has not yet taken place and is unlikely to.  USA is as dependent upon China as China is on the US. To more accurately gauge potential adversity in Australian financial markets, investors should be keeping a closer eye on China’s consumption and productivity levels than Trump’s Twitter feed.

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