Market movers today

Market action is likely to be driven by political developments rather than data releases, of which there are none of note today.

The trade war has become a permanent fixture in the universe of market drivers. Markets may also look at foreign policy developments as Trump tours Europe, the end of the North Korea-US honeymoon, the upcoming NATO and Trump-Putin summit.

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Selected market news

The trade war between the US and China escalated on Friday. Washington and Beijing imposed tariffs on USD34bn worth of goods on each other. President Trump indicated that tariffs would be imposed on a further USD16bn worth of imports, followed by USD200bn and then USD300bn, encompassing China’s exports to the US in their entirety. Neither side appears to be backing down. Risk assets took the escalation in their stride.

The US jobs report published on Friday was mixed, with an increase in non-farm payrolls, but soft wage growth figures. Non-farm payrolls beat expectations and came in at 213,000, while average hourly earnings decelerated and came in below expectations, at 0.2% m/m. The jobless rate increased from 3.8% to 4.0%. We still expect the US to hike rates twice, bringing the total number of hikes to four in 2018.

The UK cabinet unravels. Brexit Secretary David Davis and his Deputy Steve Baker have resigned. The resignations come two days after Prime Minister Theresa May thought she had won a crucial victory over Brexit hardliners when her plan for establishing free movement of industrial and agricultural goods was signed off. Free trade over goods would resolve the prickly problem concerning the border with Ireland.

Market action. USD is weaker on the mixed US job report but majors will stay focused on trade war developments this week: escalation should on net be USD positive but there are mounting Fed concerns that could dampen the possible impact. The recent GBP strength has been challenged by disarray in the British cabinet over May’s Brexit plan, but mind the stream of UK activity data this week, key to the Bank of England. The Scandies await Thursday’s Swedish inflation data, which could notably halt the recent rebound in SEK.

10Y German government bond yields continue to grind lower on the back of the US-China trade war, Brexit and the mixed US labour market report etc.

Today, the Japanese Balance of Payment statistics showed that Japanese investors sold the most German sovereign bonds in three years during May. They also sold Italian and French sovereign bonds. We expect that if German yields continue to decline and given the political uncertainty in Italy, that we will see more sell-off in Germany and Italy from Japan. They bought small amounts in Danish and Swedish sovereign bonds and Danish mortgage bonds.

This week’s supply of EU bonds will come from the Netherlands (10Y), Germany (inflation linked bonds and 10Y nominals), Portugal (10Y and 15Y) and Italy. The main focus will be on Italy. We expect to see a bit more spread widening ahead of the Italian auction.

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