Improving US-China Relations

Market movers today

It should be another quiet day with mainly US housing data and a couple of Fed speakers on the agenda.

US housing looks like it is recovering as evidenced by the rise in the NAHB housing index yesterday. Today we get building permits and housing starts for May.

Fed’s Bullard and Williams will both be speaking. Bullard is among the most hawkish members while Williams is more neutral.

The 60 second overview

Markets: European equity markets were off to a cautious start to the week with most indices in negative territory. US markets were closed due to the Juneteenth holiday. This morning, Asian equity markets are broadly mixed on the back of more monetary policy easing from China. The People’s Bank of China cut two more key lending rates for the first time in 10 months to support growth in the world’s second largest economy. The Chinese central bank cut the one-year loan prime rate by 10bp from 3.65% to 3.55%, and trimmed the five-year loan prime rate by 10bp from 4.3% to 4.2%. Equity futures point to a red opening in Europe and in the US later.

Blinken visit to China provides progress in US-China relations: It seems the visit by US Secretary of State Anthony Blinken to Beijing went as well as one could have hoped for. A key sign is that Blinken met Xi Jinping at the end of the visit. It was not a guarantee before the trip as it is not always custom due to their difference in ranks. But the fact that it happened suggests some real progress was made towards stabilizing the relations between US and China in Blinken’s meetings with China’s foreign minister Qin Gang and China’s top diplomat Wang Yi. Before the meeting between Xi and Blinken started, Xi stated that “the two sides have also made progress and reached agreement on some specific issues. This is very good”. Rare positive words on US-China talks.

New Nordic outlook: This morning, we published our new Nordic Outlook – Too soon to celebrate, 20 June. The news has mostly been good in recent months when it comes to inflation, employment and the near-term growth outlook in most major economies. However, we have yet to see the full effect of the monetary and fiscal tightening that has already happened, and inflation is still not sufficiently under control. We expect prolonged slowdown and moderately higher unemployment, with the risk of a deeper recession still present. This is also true in the Nordic countries, even though the outcome so far has surprised positively in Denmark and Sweden.

Continuing hawkish signals from the ECB: Schnabel’s speech yesterday was filled with hawkish signals. She seems to favour one too many hikes than one too few, and she particularly warned against the risk of underestimating underlying inflation given its recent history. Notably Schnabel’s hawkish inflation assessment sent yields higher, as she particularly said that they should ‘err on the side of doing too much rather than too little’ with uncertain inflation outlook. Lane’s more cautious assessment did not seem to impact markets. The peak policy rate rose to 3.97%. The July ECB meeting is basically perceived as a ‘done deal’ by market pricing, yet the battle for September will be key, where markets currently price 18bp.

Equities: Equities saw some pushback on Monday, in thin volumes as US was closed for holidays. Stoxx 600 was down about -1% alike most Nordic markets. It was not a clear cut risk-off session though. An odd mix of banks and tech did relatively well, while it was partly defensives (health care, staples) that sold off, but also real estate and materials. Medical technology stocks were battered, driven by profit warnings from both Getinge and Sartorius. Asian markets are mostly lower too, despite another round of Chinese stimulus measures today. US futures are a notch lower this morning.

FI: Markets sold off through the day with the 10y point up around 5bp in core countries. After a remarkable spread tightening between Italy and Germany of more than 30bp this month, yesterday saw a 4bp reversal. The spread still remains tight at just 160bp. With the low realised volatility, the credit component in rates markets have performed. US was closed yesterday.

FX: EUR/SEK continued its move higher yesterday, trading close to the 14-year high of 11.78 fuelled by risk-off sentiment, periods of low liquidity and mere momentum trading. GBP took a breather from the past months’ gains as markets await the May inflation data out Wednesday and Bank of England monetary policy meeting Thursday. EUR/USD declined steady throughout the session, trading firmly below the 1.10 mark.

Credit: Credit markets were relatively calm on Monday despite a small leg lower in equities after soft markets in Asia. With the US market out for a public holiday, there were few signals from one of the key markets thus leading to relatively slow trading. Itrax main widened 0.9bp to close at 76.2bp, while Itrax Xover widened 5.5bp to close at 399.4bp. With the summer break nearing, primary markets were fairly active with both SSA’s, Financials and HY corporates coming to the market. Among notable Nordic issuers in the market on Monday were European Energy tapping existing hybrid debt and SBAB which printed EUR500m in green SNP’s.