Markets
Core bonds erased all (Germany) to part (US Treasuries) of this morning’s gains during European dealings. The gains stemmed from US President Trump’s twitter rage against China, saying he will raise tariffs on existing Chinese imports and introduce new ones on goods which are currently left out. The announcement poured cool water on trade negotiations which are still intended to restart on Wednesday in Washington. The adverse market reaction proves that markets weren’t anticipating hiccups in what seemed to be the final inning of US-Sino trade negotiations. Core bonds and oil markets (initially lower) returned course from the European start while stock markets (-2% in Europe) failed to do so. Today’s eco calendar was empty bar outdated EMU retail sales (flat in March) and Final EMU services PMI’s. The US yield curve bull steepens at the time of writing with yields down 4.3 bps (2-yr) to 2.1 bps (30-yr) lower. The German yield curve bull flattens slightly with yield dropping between -0.4 bps (2-yr) and -1.3 bps (30-yr). 10-yr yield spread changes vs Germany widen by 1 bp to 3 bps.
US president Trump threatening to raise tariffs on Chinese imports shocked global investors and triggered a sell-off on global equity markets. However, the impact on core bonds and on FX was much more modest. Smaller, less liquid currencies (e.g. the Swedish Crown) lost ground, but most moves developed in an orderly fashion. The yen attracted safe have interest in Asia this morning. USD/JPY dropped to the 110.30 area but reversed part of the initial loss later. The intraday swings in EUR/USD are remarkably limited. The pair held a tight range close to, mostly slightly below 1.12 for most of the day. The trade-weighted dollar showed a similar lackluster pattern, holding in the mid 97 area. So, the dollar hardly profits from the trade-tensions. Several reasons are in play. The ‘high-yielding’ dollar is losing interest rate support against the likes of the euro as US yields decline more than European ones. More trade turbulence might weigh on US data and raise chances for a Fed rate cut. A further escalation of the trade war at some point might cause US president Trump threatening to weaken the dollar in order to support US exports. EUR/USD is currently trading in the 1.1180/85 area. Remarkably, the Swiss franc also didn’t profit. A rise in sight deposits at the SNB maybe rekindled speculation on SNB interventions.
UK markets were closed for a holiday. At the end of last week, sterling rallied as investors hoped/speculated that the defeat in the local elections could inspire the conservative party and labour to put aside differences and strike a Brexit deal. However, political comments over the weekend showed that the water between the two remains deep. Sterling ceded ground today. EUR/GBP rebounded off the 0.85 area and trades currently near 0.8540.
News Headlines
A broad risk-off move and a further declining Swedish PMI business confidence (services 54.0 vs. 55.1 in March) send the country’s krona again lower vs. the euro. Krona selling pressure increased during US trading hours, sending EUR/SEK to an intraday high 10.74, the highest level in almost a decade.
Former Catalan leader Puigdemont, who fled to Belgium in 2017 to avoid being arrested because of his role in an independence referendum, can run in the European elections on May 26, a court in Madrid ruled today.
A closely watched volatility indicator (VIX) spiked this morning and remains at elevated levels (around 18) as markets assess president Trump’s renewed tariff threat. The VIX jumped almost 5 points and ends the period of relative calm that kicked in after the October-December shock waves roiled markets.
