Global core bonds gained ground yesterday with US Treasuries outperforming German Bunds. The ongoing trade dispute between the two largest economies continued to weigh on investor sentiment, diverting money flows into safe havens. Core bonds maintained their upward bias of late and got further supported by disappointing eco data. Poor EMU PMI’s and a weaker-than-expected German Ifo survey suggest that growth for the eurozone will most likely remain sluggish in the second quarter of the year. The German yield curve fell with losses up to -3.4 bps (10-yr). At the US opening, US PMI’s missed expectations by a landslide and pushed US Treasuries even higher. The US yield curve bull flattened with changes in the range of -5.3 bps (30-yr) to -7.6 bps (2-yr). All US yield are now trading at 2019 lows. Risk sentiment is mixed across Asia overnight. The White House proposed tariffs on goods from countries found to have undervalued currencies, targeting i.a. China, Japan and South Korea. Core bonds stabilize overnight with a slight downward tendency. However, as the past few weeks, we err on the side of cautiousness. Today’s eco calendar will not steer traders today, but remains interesting. The US will print durable goods orders for April, while the UK publishes retail sales for April. US markets are closed on Monday (Memorial Day).

The dollar rallied yesterday, profiting from a further risk-off repositioning as the US-China trade war intensified. EMU confidence data were mixed and suggested mediocre growth in Q2. EUR/USD was in the defensive and tested the 1.1112 year low early in US dealings. The trade-weighted dollar (DXY) also touched the highest level in 2 years. At that time, the US Markit PMI’s printed sharply lower, raising fears that the US will also feel ever more fall-out from the trade war. The decline in US yields accelerated and blocked the upside test of the dollar. The dollar reversed the intraday gain. EUR/USD closed at 1.1181 (from 1.1150). USD/JPY extended its decline to close at 109.60. This morning, Asian equities are trading mixed. US president Trump said that Huawei could be part of a US-China trade deal. At the same time, the US administration is proposing tariffs on countries the US considers to have undervalued currencies. If implemented, it would be an important step in the US trade policy (and a potential negative for the dollar). For now, USD/CNY stabilizes in the 6.91 area. USD/JPY hovers in the 109.50 area. EUR/USD maintains yesterday’s rebound , trading near 1.1180. Later today, there are no important EMU data. In the US the April durable goods orders are expected to decline after a strong march reading. The series is volatile, but in the wake of yesterday’s data, the US currency might be more vulnerable to negative news. Yesterday’s rejected test of the 1.1110 confirms that it provides solid support and that it won’t be that easy for the dollar to succeed a next up-leg. Maybe there is room for EUR/USD to regain some further ground in the 1.110/1.1260 consolidation pattern.

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The sterling decline took a breather yesterday. EUR/GBP failed to break the 0.8840 resistance. The initial decline of EUR/USD also weighed on EUR/GBP. However, the EUR/USD dip was reversed later and the political developments in the UK didn’t warrant much sterling optimism. EUR/GBP closed the day at 0.8834. Today, the UK retail data will be published. April sales are expected to ease after a strong March report. We remain cautious/negative on sterling. A break above 0.8840 resistance remains possible, especially if EUR/USD would rebound further.

News Headlines

The US proposed tariffs on goods from countries that are engaging in competitive devaluation of their currencies, a sweeping trade policy tool that could target both China and US allies. Moreover, Trump remained positive that negotiations with China could get back on track, while he called Huawei “very dangerous”, but hinted that the Chinese tech giant could be included in a possible trade deal.

Consumer inflation in Japan rose to 0.9% (YoY) in April, as expected, up from 0.5% a month before. Core inflation, stripping out energy and food prices, rose 0.6% (YoY), up from 0.4% in March, the fastest rate since 2016. While the April figures represents a slight uptick, Japan’s inflation remains well below the BoJ 2% target..


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