Markets
Global core bonds lost ground yesterday with US Treasuries underperforming German Bunds. The ongoing US-Sino trade spat put investors in wait-and-see modus. Equity markets around the globe suffered, but core bonds couldn’t profit. The German yield curve bear steepened with gains up to +2.4 bps (30-yr), while the US yield curve moved higher with changes up to +3.1 bps (5-yr). Overnight, the US granted a 90-day relief for certain US companies to trade with Chinese tech company Huawei. Although the move is only a minor encore, sentiment got lifted across Asia with Chinese indices outperforming. Furthermore, comments by Fed chief Powell were insignificant and had no impact on financial markets. Global core bonds are treading water this morning. Today’s eco calendar is meagre, so the trade story will likely dominate trading again. The EMU consumer confidence for May does catch our eye and is expected to slightly recover from last month’s -7.9. Next, the OECD publishes the economic outlook and Fed heavyweights Evans and Rosengren speak.
The escalation in the US-China trade war triggered a sell-off in US and European equities yesterday. However, the fall-out on FX was modest. The yen outperformed temporary, but USD/JPY still closed just north of 110. The dollar initially also lost some ground against the euro as the US-German spread narrowed slightly, but EUR/USD swings were also contained to a tight range. EUR/USD closed the day marginally stronger at 1.1166 (from 1.1158). Overnight, sentiment on risk improved as the US government temporary eased the restrictions on Huawei. Asian equities (excl. Japan) are rebounding and so does the dollar. Fed’s Powell maintained its wait-and-see bias in a speech. He indicated it would be premature to draw conclusions from the trade talks for policy. The USD-reaction was close to non-existent. If anything , it might be a tentatively USD-supportive. Governor Lowe said the RBA will consider a rate cut at the June meeting as it could support employment growth. AUD/USD returned below 0.69. Later today, the eco calendar contains US existing home sales and the EC consumer confidence. We don’t expect a profound impact on euro or USD trading. The market focus will remain in the next scrimmages in the US-China trade war. We are not convinced that the US concessions on Huawei will already lead to a sustained easing of the session. The dollar might maintain the benefit of the doubt, but we don’t expect a big leap higher. The EUR/USD 1.1110 area remains an import support.
After a temporary breather, sterling lost further ground yesterday. UK PM May still intends to bring her withdrawal bill to Parliament. However, the conservative party remains highly divided both on the concession that can be made to the labour opposition as well as on the succession of PM May. EUR/GBP closed at 0.8776. Today, CBI order data are interesting, but markets will in the first place watch a meeting of May’s cabinet. After recent decline, sterling probably already discounts some bad news. However, as the political noise will probably persist for some time to come, we remain cautious on sterling long exposure. 0.8840 is the next higher profile EUR/GBP resistance.
News Headlines
The US Commerce Department granted a 90-day relief for certain US broadband companies and wireless customers relying on Chinese tech company Huawei for equipment. Huawei founder Zhengfei said that the US is underestimating Huwaei’s capabilities, adding that the company is prepared for such a scenario.
Thailand’s economy grew 1.0% (Q/Q) and 2.8% (Y/Y) in the first quarter, its slowest pace since 2014 as exports suffer on weaker global demand and trade tensions. GDP growth in Singapore rose to 3.8% (Q/Q) in the first quarter. Compared to a year ago, GDP rose 1.2% (Y/Y), the slowest pace in almost a decade.
