Markets:
The pace of China’s retaliatory measures against last night’s detailed list by the US administration of import tariffs against Chinese products took markets by surprise. China slapped 106 products with tariffs of up to 25%, matching the US’s $50bn package. An eye for an eye and a tooth for a tooth. The measures send US equity futures tumbling, registering losses to the tune of 2%. The spill-over to European stock markets amounts to about 1%. Commodity markets lost significant ground as well with investors fearing a backlash to global growth. The key driver during the remainder of today’s trading session will of course be stock market sentiment, with main indices fighting back after the official opening. Medium term, we eye the February low in the S&P 500 (2532). A move lower would steadily install a technical pattern of lower highs and lower lows and suggest and end to the bullish stock market, suggesting consolidation ahead.
FX markets again managed to withstand the new escalation in the US/Chinese trade conflict. The trade-weighted dollar overcame initial weakness and trades currently close to opening levels. EUR/USD spiked temporary above the 1.23 mark, but faces difficulties to stay north of that level. The Japanese yen is the only one who really profits from the safe haven status with USD/JPY currently around 106.25 compared to a 106.60 opening. Sterling reversed yesterday’s gains as it faced exactly opposite forces. Risk aversion instead of a risk-on climate and a very weak construction PMI instead of yesterday’s good manufacturing PMI. EUR/GBP rose from 0.8715 to 0.8740 currently.
Core bonds eked out relatively small gains given the new US stock market swoon. US Treasuries slightly outperformed German Bunds. The German yield curve bull flattens at the time of writing with yields 0.4 bps (2-yr) to 1.1 bp (30-yr) lower. US yields decline by 1 bp (30-yr) to 1.7 bps (5-yr). We argued before that equity weakness because of an escalation in the trade conflict shouldn’t necessarily result in lower yields via safe haven flows as China might consider a reallocation of its FX reserves away from US Treasuries. The discrepancy between strong US (labour) market data and disappointing EMU (inflation) data failed to trigger any significant market action on core bond or FX markets.
News Headlines:
China hit back quickly against the Trump administration’s plans to slap tariffs on $50 bn in Chinese goods, retaliating with a list of similar duties on key US imports including soybeans, planes, cars, beef and chemicals. US Commerce Secretary Ross responded that he isn’t surprised by the Chinese reaction and predicted that both countries might end up negotiating. US President Trump tweeted that the US is not in a trade war with China.
The US ADP employment report showed a net job creation of 241k in March, beating 210k consensus, confirming ongoing strength on the US labour market and boding well for Friday’s payrolls. ADP upwardly revised the March outcome from 235k to 246k. The US non-manufacturing ISM remained strong in March, declining from 59.5 to 58.8.
The Eurozone unemployment rate fell as expected from 8.6% to 8.5% in February, the lowest level since December 2008. Labour market strength doesn’t really translate into upward wage/inflationary pressure though. The EMU core CPI stabilized at 1% Y/Y in March, printing below 1.1% consensus. The headline inflation figure rose from a downwardly revised 1.1% Y/Y to 1.4% Y/Y, mainly driven by a surge in food, alcohol and tobacco prices (2.2% Y/Y).
The UK construction PMI unexpectedly dropped below the 50 boom/bust mark in March. The decline from 51.4 to 47 was the sharpest since July 2016 and caused by a snowstorm that hit the UK in late February and early March.
