Markets:
Global core bonds gained ground today with US Treasuries heavily outperforming German Bunds. The negative risk sentiment of last week continued this morning as the US-Sino trade negotiations reached an new low. President Trump has given China a month to agree to a deal or it will impose tariffs on all remaining Chinese imports. Asian equities edged lower overnight, while global core bonds opened higher. The US/EMU eco calendar is empty today, leaving sentiment to be investor’s sole driver. EU equities also opened lower, further supporting core bonds. After lunch, China announced it will levy up to 25% import tariffs on $60bn of US imports, further deteriorating hopes of a positive outcome and initiating a new upleg in core bonds. The German yield curve bull flattened with losses up to -1.6 bps (30-yr). US Treasuries retreated from session highs as Chinese media reported that China, who’s a large and important purchaser of US public debt, is discussing the possibility of dumping US Treasuries. US equities opened with losses up to 2%. At the time of writing, the US yield curve edged lower with changes up to -7.4 bps (2-yr) as investors raise the odds of a Fed interest rate cut. Peripheral spreads over the German 10-yr yield are widening with Greece (+7 bps) and Italy (+2 bps) underperforming. Italian local media reports that PM Conte suspects that deputy PM Salvini may be preparing to bring down the government coalition.
Sentiment on risk remained fragile this morning, keeping USD/EUR and USD/JPY near recent lows. Of late, the dollar suffered more from the trade tensions compared to the euro and the yen. European equities opened with modest losses but investors soon realized that headlines on a further escalation of the US-China trade conflict are probably just around the corner. Global market sentiment indeed deteriorated again as China retaliated last week’s rise in US tariffs as it announced a reciprocal hike in tariffs on US goods starting June 1. The dollar again proved to be the weakest link amongst the FX majors. US yields dropping triggerd further USD selling. Later, the decline in US yields slowed on rumours that China was considering to reduce its holdings of US Treasuries. The rumours were not confirmed but evidently didn’t help the dollar. Will the trade war translate into some kind of currency war? USD/JPY dropped to the low 109 area. The EUR/USD 1.1265 intermediate resistance is coming within reach.
EUR/GBP hovered in the 0.8645/25 area for most of the day. The political stalemate in Brexit persists even as officials of the labour opposition and the government were scheduled to continue talks today. However, with no high profile news on the negotiations, trading in the major sterling cross rates was mainly driven by the global performance of the dollar and the euro. EUR/GBP regained a few ticks this afternoon bus is trading little changed in a daily perspective (currently 0.8635 area). Cable is extending gains north of 1.30 on USD weakness.
News Headlines:
China said that it would increase tariffs on $60bn worth of US goods to between 1% and 25% starting on June 1 in a response to the US’s tariff action. The global times also suggested China may stop purchasing US agricultural goods and reduce Boeing orders. The editor even hinted at building down the US Treasury portfolio.
Norwegian growth slowed more than forecast in Q1. GDP grew by 0.3% Q/Q when excluding oil and shipping, down from an upwardly revised 1.1% Q/Q in Q4 2018. A 1.2% decline in investments and a pickup in imports dragged down growth. The Norges Bank which plots another rate hike next month, penciled in 0.6% Q/Q growth for Q1. EUR/NOK temporarily rose from 9.8 to 9.84.
EU trade chief Malmstrom said in a Bloomberg television interview that the EU is preparing a list of possible items to slap tariffs on against the US in the event that US President Trump imposes levies on car imports. The US President is expected to make that call by May 18.
