Rates: Investors flee to safe havens as China retaliates
China is not standing down and promised to retaliate with tariffs on US imports. US equities retreated heavily with investors fleeing to safe havens. US Treasuries heavily outperformed other core bonds. Sentiment eased overnight, but we remain cautious on further improvement. Today’s eco calendar will need to take investors off-guard in order to have an impact.
Currencies: USD decline the take a breather, at last for now.
The USD was captured in a new selling wave yesterday as China retaliated on last week’s US tariffs hike. The dollar lost further interest rate support as markets anticipate a Fed rate cut later this year. Overnight, trade tension show tentative signs of cooling down. If so, the dollar might enter calmer waters, at least temporary
The Sunrise Headlines
- The US-Sino tit-for-tat trade war dealt a huge blow to stock markets yesterday with US indices losing 2.4% to 3.4%. Losses on Asian markets are smaller this morning as remarks by US President Trump bring some minor reprieve.
- After first threatening to impose tariffs on another $300bn worth of Chinese goods in one month’s time, US President Trump said that he has a feeling that trade talks are going to be very successful in about 3 or 4 weeks.
- Boston Fed Rosengren, voter, warned that the accelerating trade war is increasing the risk of something bad happening to the US economy. Therefore it’s wise to keep rates steady for now.
- UK PM May’s cabinet meets today to assess Brexit talks with Labour. Key opposition demands, customs union & referendum on any deal, are probably insurmountable. A new series of Commons votes on Brexit options is then likely.
- The Financial Times reports that global market regulators are beginning to offer big concessions to help banks struggling away from Libor. They would be allowed to develop new rates to more closely match funding and lending costs.
- Facebook is raising its minimum wage for contract workers from $15/hour to $18 or $20 because current standards are no longer enough for those who live in expensive areas like the San Francisco Bay Area.
- Today’s economic calendar contains UK labour market data, German ZEW investor sentiment, US NFIB small business optimism and export/import prices. Italy taps the bond market. ECB Villeroy, Fed Williams and Fed George speak.
Currencies: USD Decline The Take A Breather, At Last For Now
Dollar sell-off to take a breather?
Investors yesterday awaited the next steps in the US China trade war. This next step occurred early in US dealings as China imposed reciprocal measures against last week’s US tariffs hike. US yields and the US-German rate differential declined sharply as markets prepared for Fed rate cuts. The dollar took another hit. However, the US currency soon found a floor. Especially, the loss against the euro was reversed quite easily, probably as markets realised that the trade fallout on Europe will also be substantial. EUR/USD even closed slightly lower at 1.1222. USD/JPY closed at 109.30 (from 109.95)
This morning, Asian equities show modest losses as president Trump gave some ‘comforting comments’ even as the US is still preparing additional tariffs. The trade-weighted dollar stabilizes near 97.30. USD/JPY rebounds (109.65 area), but so does EUR/USD (1.1240 area). The yuan basically stabilizes (USD/CNY 6.8725 area). China apparently doesn’t seek further yuan weakness as a weapon in the trade war.
The final German final CPI is expected at 2.1% Y/Y. ZEW confidence is forecast to improve from 3.1 to 5. A downward surprise, especially for the CPI might ease the euro positive momentum. US NFIB small business confidence and import prices will be released. Price action suggests the trade war narrative is turning less aggressive, allowing investors to take a breather after the risk sell-off.
Last week, the trade dispute weighed more on the USD than on the euro (and the yen) as markets see a rising chance for Fed cuts as tensions might undermine US growth. However, the USD decline slowed yesterday. EMU growth is also at risk. In this context, it isn’t evident to see sustained euro outperformance. We expect the EUR/USD 1.11/1.14 range to hold. Intermediate resistance is coming in at 1.1265 (almost tested yesterday) and 1.1324.
Yesterday, EUR/GBP drifted higher in the 0.86 big figure. Initially, the moves in EUR/GBP and cable were at least partially USD and/or euro driven. Still underlying sentiment on sterling remained weak as markets saw momentum in the Brexit talks between labour and the government further eroding. Today, the UK labour data will be published. We doubt the rapport will be able to help sterling. The stalemate in the Brexit talks and rising tensions in the conservative party on PM May’s position will probably keep sterling in the defensive. 0.8682 resistance and the 0.8722 MT range top are within reach.
EUR/USD: dollar decline to slow, at least temporary?
