- Rates: Trump and Xi agree to resume trade talks
Presidents Trump and Xi Jinping agreed to resume trade talks, refrain from new tariffs and ease restrictions on Huawei. US (and to a lesser extent German) yields rebound. US data is expected rather soft today. Nonetheless, we think global core bonds will hold on to (at least part of the) losses in the wake of the trade ceasefire 2.0.
- Currencies: Dollar rebounds on higher US yields after G20 meeting
A new trade truce between the US and China caused a diffuse reaction on global FX markets. The yuan rebounds. At the same time, the dollar strengthens against the yen and the euro as the risk-rebound also raises US yields. The focus for USD trading will soon return to the eco data. Will a soft manufacturing ISM already slow the post-G20 USD rebound?
The Sunrise Headlines
- US stocks ended in green after a rather volatile session ahead of the G20 summit. The S&P500 (+ 0.58%) outperformed. Asian equities soar with China outperforming (+ 2-3%) after a renewed trade truce.
- Presidents Trump and Xi agreed to resume trade talks during a meeting at the G20 summit. Trump also pledged not to introduce more import tariffs while toning down on China’s Huawei.
- Russian President Putin said this weekend the oil output cuts, which expired in June, could be extended with another six to nine months. Saudi Arabia supported Putin’s talk. Oil prices jumped.
- China’s Caixin manufacturing PMI unexpectedly dipped below the 50 boom/bust mark in June (49.4). Japan’s Tankan survey also showed another loss of confidence in both small and large (non-)manufacturing companies.
- EU discussions to choose the next EC president are at an impasse. The Dutch socialist Timmermans, in pole position after the EPP’s Weber failure to secure backing, meets with resistance from eastern European states.
- During a ‘surprise visit’ by Trump to North Korean leader Kim Jong Un both agreed to push forward talks about the denuclearization of North Korea. US Secretary of State Pompeo told a new round would likely happen in July.
- In today’s economic calendar ISM/PMI manufacturing confidence is due in the US and UK. European data is of secondary importance. ECB VP de Guindos and Fed VC Clarida are scheduled to speak.
Currencies: Dollar Rebounds On Higher US Yields After G20 Meeting
Dollar rebounds on higher yields post-G20
(FX) investors refrained from building big direction positions last Friday ahead of the meeting between Presidents Trump and Xi on Saturday. US income and spending data were OK, but price deflators were close to expectations. The report had little impact on the dollar. EUR/USD closed at 1.1373, from Thursday. USD/JPY finished at 107.85 (from 107.79).
Presidents Trump and Xi agreed to restart trade talks, avoiding a further escalation in the tariffs war. There are indications of mutual goodwill, but several important issues still must be addressed. For now, there few indications that the US pushed for an aggressive USD weakening, but the issue isn’t out of the way yet. The trade truce triggers a risk rally in Asia. The impact on FX trading was mixed. The dollar profits from higher US yields, with USD/JPY outperforming (currently 108.35 area). EUR/USD is drifting further below 1.1350. At the same time, the yuan strengthened (USD/CNY 6.8375) despite mediocre China PMI’s. The AUD reversed earlier strength as poor Chinese data and market caution ahead of the RBA meeting weighed. The pair is drifting back below the 0.70 barrier.
Today, markets will continue to assess the consequences of the Trump-Xi meeting. The USD might profit a bit further of the rise in US yields, but question is how far this move will go. The focus will turn to the early month data, with the EMU PMI’s and the US manufacturing ISM. The ISM is expected to ease further to 51.0 from 52.1, in line with recent soft reading of other US business sentiment indicators. We expect any rise and US yields and subsequent USD rebound to remain guarded. The EUR/USD 1.1300/1.1250 area should provide solid support.
On Friday EUR/GBP came close to the 0.90 barrier a real test again didn’t occur. Sterling finally regained modest ground. Today, UK money supply and lending data and manufacturing PMI (expected 49.5 from 49.4) will be published. However, the focus of markets remains on the contest for the leadership of the UK conservative party between Boris Johnson and Jeremey hunt. Both candidates a proposing fiscal stimulus/tax cuts to protect the UK economy in case of a no deal Brexit. It remains uncertain whether that will be enough to contain the damage for the economy, but ST it might be an element for sterling bears to become a bit more cautious. Still we expect any sterling rebound to remain limited if overall uncertainty on Brexit persists.
EUR/USD: dollar profits from higher US yields after G20