The US and China raised the stakes in their standoff on trade over the past 48 hours. Both sides sharpened their knifes by announcing lists of products possibly subject to a cumulative $50bn in tariffs. The Chinese response came only 11 hours after the US’s opening gambit, taking market participants by surprise. Risk aversion reigned during yesterday’s European trading hours. US stock markets opened around 1.5% weaker. Spill-over effects to other markets remained very limited, apart from small, temporary, gains for core bonds and the Japanese yen. EUR/USD is still stuck in its “comfort zone” roughly between 1.2250 and 1.2350.
Risk sentiment turned for the better as US dealers entered trading. High rank US (eg Commerce Secretary Ross and economic advisor Kudlow) and Chinese officials downplayed all the fuzz created by the proposed tariffs and emphasized that both countries will now enter a lengthy discussion period with the aim of finding a new “normal”. US stock markets closed 1% to 1.5% higher with the three main indices painting a potential technical bullish engulfing signal on the charts. Core bonds ended mixed with the US Note future underperforming the German Bund. The US yield curve bear steepened with yields 1.4 bps (2-yr) to 2.7 bps (10-yr) higher. The US 10-yr yield returned north of previous support (2.8%). Changes on the German curve were limited between -0.3 bps and +0.2 bps. The dollar took the upper hand as risk sentiment improved, which was mainly visible in USD/JPY’s return from 106 towards 107. A move above 107.29 (first) resistance would break the yen’s momentum and would be a third technical sign that risk sentiment could improve in coming days. EUR/USD finished the day at 1.2278, nearly unchanged from the 1.2271 opening. EUR/GBP closed (0.8721) near opening levels as well, but was subject to more intraday volatility via stock markets. Strong US eco data (ADP, non-manufacturing ISM) and stubbornly low core EMU inflation were overshadowed yesterday by developments in the US/Chinese trade dispute.
Asian stock markets join WS’s rebound overnight with China and Hong Kong closed. The US Note future and Japanese yen lose somewhat more ground, suggesting an improvement in risk sentiment at the start of European trading as well with a lower opening for the Bund. Today’s eco calendar contains only second tier eco data with final PMI’s, retail sales and PPI data in the EMU and weekly jobless claims in the US. Risk sentiment will be the key driver for trading. We think that there is room for a more sustained improvement which could weigh on core bonds with US Treasuries underperforming German Bunds. This week’s US eco releases were strong and bode well for tomorrow’s payrolls. Risk-on sentiment, strong US data and a rising US/German yield differential should help the dollar on FX markets, especially against the yen, but also against the euro. Sterling traditionally profits from an improvement in risk sentiment, but traders will also take today’s services PMI into consideration. Consensus expects a small setback from 54.5 to 54 in March. A good outcome (like the manufacturing PMI earlier this week) could trigger a test of the key 0.8668/0.87 support area in such market conditions. We don’t anticipate a break lower at this stage. An agreement on the Irish border between the EU and the UK is probably necessary to give sterling another sustained push in the back.
US President Trump’s economic adviser Kudlow joined Commerce Secretary Ross in stressing there’s still time to talk with Chinese official. “None of the tariffs have been put in place yet, these are all proposals”. The Chinese ambassador to the US, who met with the acting US secretary of state, also reiterate a preference for discussion
The Trump administration has softened a key Nafta demand for more North American content in car manufacturing. It’s a potential olive branch on arguably the biggest sticking point as the US pushes to reach a stopgap deal this month, according to three people familiar with the talks.