Rates: US 10-yr yield tests important support
An intensification of the equity sell-off could generate more safe haven flows into core bonds. The nature of the stock market root suggests though that this link might break at one stage (eg if China reduces US Treasury purchases). The US 10-yr yield tests 2.8% support. We don’t expect a break, but wait until after the weekend to enter short bond positions.
Currencies: Trade war a tentative USD negative?
The dollar didn’t suffer much from yesterday’s risk-off correction. However, further USD/JPY losses might also affect other USD cross rates. Still we expect EUR/USD to hold the established consolidation pattern. EUR/GBP is rebounding back higher in the 0.87 big figure after a downside test following the BoE’s policy decision was rejected.
The Sunrise Headlines
- US stock markets lost huge ground (-2.5% to -3%) after US president Trump came through with his pledged trade offensive against China. Main Asian equity indices lose even more ground overnight (-3% to -5%).
- China fired a retaliatory shot against the US, announcing planned tariffs against American goods and saying it is readying more actions against the Trump administration’s proposed penalties on Chinese exports.
- US President Trump has replaced his national security adviser HR McMaster with foreign policy hawk John Bolton, an explosive appointment that signals a further lurch to the right and points to a White House in turmoil. (FT)
- The US Senate passed a $1.3 tn spending bill, acting to avert a government shutdown with less than 24 hours to spare and bringing to a close a messy negotiating process over the sprawling measure.
- The BoJ’s preferred inflation measure, the national CPI excluding fresh food, accelerated in February in line with forecasts from 0.9% Y/Y to 1% Y/Y. Headline inflation rose to 1.5% Y/Y.
- OPEC members will need to continue coordinating with Russia and other non-OPEC oil-producing countries on supply curbs in 2019 to reduce global oil inventories to desired levels, Saudi Arabian Energy Minister al-Falih said.
- Today’s eco calendar contains US durable goods orders. Fed governors Bostic, Kashkari, Kaplan and Rosengren are scheduled to speak. The EU Summit continues with discussion on global trade developments
Currencies: Trade War A Tentative USD Negative?
Trade war escalation: a tentative USD negative?
USD bulls were a bit disappointed after the FOMC meeting, but dollar selling eased soon as markets realized that policy normalization remains firmly in place. EMU PMI’s again missed the consensus by a big margin, capping potential euro gains. After an initial spike, EUR/USD drifted lower in the 1.23 big figure. Later, risky assets sold off as US president Trump ordered to impose tariffs on Chinese imports. This was quite neutral for EUR/USD. The pair closed the day at 1.2302. The yen jumped sharply higher with USD/JPY closing at 105.28 and EUR/JPY at 129.52
The equity sell-off accelerated overnight with major regional indices losing up to 5% even as the first reaction of China (considering tariffs on imports worth $3 bn) can be seen as rather moderate. USD/JPY declined further (currently 114.80). Japanese inflation was in line with consensus (1.5%Y/Y headline, 1.0% core) ,but that wasn’t the focus of markets. The dollar declines slightly against the euro (EUR/USD 1.2335).
US new home sales and durables are expected to rebound after a poor January reading. Several Fed governors speak. They might bring some insight on the internal dynamics during the FOMC meeting. However, the focus will be on the next steps in the China-US trade war. Trade tension had no big impact on the USD’s performance yesterday (excl. USD/JPY). The dollar slightly underperforms this morning. We keep a cautious approach on the dollar as long as the trade war dominates market highlights. Even a widening of the USD-EUR interest rate differential maybe won’t help the dollar. Underperformance of US Treasuries might be due to the wrong reasons (US risk premium, less buying of China). USD/JPY remains most vulnerable. At the same time, any further EUR/USD gains might be slowed by selling from EUR/JPY. The trade war is a growing source of uncertainty, but for now we assume that the 1.2155-1.2555 trading range remains in place.
EUR/GBP tested the 0.8688 downside barrier yesterday as two BoE members already voted for a rate hike. However, a sustained break didn’t occur. EU leaders will approve the guidelines for further Brexit talks today. We don’t expect big news for sterling. The risk-off context might also be slightly sterling negative (EUR/GBP supportive). A modest technical rebound after yesterday’s EUR/GBP rejected downside test might be in the cards.
USD (Trade-weighted): no clear USD reaction to trade war escalation
