Rates: Risk aversion lifts core bonds
Rising oil prices and the de-escalation of the CDU/CSU rift drop from the equation which kept core bonds in balance yesterday, leaving the new tit-for-tat threats in the US/Chinese trade row as the only factor influencing trading. Core bonds profit from global risk aversion. Today’s eco/event calendar probably won’t put much counterweight.
Currencies: Euro resists trade tensions, for now. Yen rallies
The euro held up well yesterday and this morning, even as trade tensions between the US and China intensify. The yen strengthens with USD/JPY declining below the 110 handle. The US-Chinese trade conflict will continue to dominate trading today. A further decline of USD/JPY-EUR/JPY might finally also spill over to EUR/USD.
The Sunrise Headlines
- The US equity markets continues to lose with the trade war still in play. The Asian markets opened with losses and Chinese markets underperforming (Shanghai Comp -3%) after markets were closed yesterday.
- Ping pong between the US and China continues, with Trump announcing new tariffs on $200bn in Chinese goods. The trade conflict between the two world powers now seems to have escalated, with China announcing again to retaliate.
- In the UK, the House of Lords have rejected PM May’s proposal on the ‘meaningful vote’ that would give the Parliament only a symbolic vote on next steps in Brexit, if they don’t approve the deal that May negotiated with the EU.
- Pedro Sanchez, Spain’s new PM, stated he has no intentions of calling early elections and will go until the end of the term in 2020. Early elections were expected, since his party controls less than a quarter of the seats in parliament.
- FED’s Bostic supports the rate hike of last week, but shifted his business optimism he had at the beginning of this year to a more balanced outlook: “risk-off behaviour appears to have become dominant due to the trade war”.
- Australia’s central bank (RBA) expects the economy to pick-up growth with more than 3% this year. It warns, however, that high household debt and slow wage growth will keep interest rates at their all-time lows for some while longer.
- With few important eco data scheduled for release, the ECB’s Forum in Sintra is the main topic on the eco agenda. At 10am Chairman Draghi gives a speech, followed by a panel chaired by its Chief Economist Peter Praet
Currencies: Euro Resists Trade Tensions, For Now. Yen Rallies
Euro resists trade tensions, for now
Yesterday, sentiment turned further risk-off with the US-China trade conflict the main driver. However, the impact on core bonds and FX was modest. After a dip early in the session, EUR/USD rebounded to close the day modestly stronger at 1.1623. USD/JPY also finished little changed (110.55). Overnight, the trade conflict escalated further. US President Trump instructed to identify another $200 bln of Chinese imports that could become subject to 10% import tariffs. China immediately said it will take ‘compressive quantitative and qualitative measures and retaliate forcefully’. This next step in the trade war weighs on Asian equities. US equity futures are losing up to 1%. The yen gains. USD/JPY declined from 110.60 to the 109.70 area. EUR/USD is little affected and even gained a few ticks (1.1630 area). Trade tensions also pushed AUD/USD to the 0.74 area. In the minutes of the June meeting the RBA stays positive on growth but it is in no hurry to raise rates.
Today, the data calendar is again thin. Markets will keep an eye at comments from the ECB conference in Sintra. However, Fed/ECB speakers will probably confirm indications from last week’s meetings. The market focus will remain on the US-China trade conflict. The conflict is at risk to escalate further. (President Turmp already indicated a next step). For now, the euro stays out of focus, probably as current battle is mainly a US-China issue. Still, Europe/European growth might soon feel the fall-out from this conflict and also become a target. So we stay cautious on the euro as this conflict develops. As usual in a context of global risk-off, we keep a close eye on EUR/JPY. A further sell-off might also spill-over to EUR/USD. After the last week’s ECB meeting, we turned cautious on the euro. Selling eased on Friday and yesterday, but policy divergence between the Fed and the ECB probably makes that the euro won’t receive interest rate support soon. A retest of the 1.1510 correction low is possible. The dollar can stay strong against the euro for longer. The trade conflict also blocked the USD/JPY uptrend.
Yesterday the House of Lords rejected the government’s proposal on the ‘meaningful vote’. The law returns to the Lower House. UK PM May risks another defeat with potentially big political consequences. EUR/GBP rebounded both on Brexit uncertainty and intraday euro strength. There are no UK data today. The focus will remain on the political bickering within the conservative party. Global uncertainty is also no positive for sterling. We expect EUR/GBP to stay in the 0.8725/0.8843 range.
EUR/USD: no fall-out from rising trade conflict yet, but picture remains fragile
