Markets

Global core bonds gain ground today with US Treasuries outperforming German Bunds. The trade dispute between the US and China is escalating again as both sides maintain a strong and attacking rhetoric. A poor Asian session suggested a weak investor sentiment at the start of European dealings. Global core bonds opened higher. EU equities opened substantially in red, supporting core bonds even more. German Bunds moved with an upward bias throughout the day, pushing the German yield curve lower with changes up to -2.3 bps (30-yr).US Treasuries behaved similar to German Bunds, though at a greater magnitude. US eco data (jobless claims, PPI’s and trade data) printed near expectations and had little impact. Investors are eyeing the US end-of-month refinancing operation with the 30-yr Note auction lined up later today. It will be closely monitored after yesterday’s flop 10-yr Note auction with the lowest bid cover since 2009. Another weak result could suggest investors need a higher risk premium on US assets. The US yield curve is edging lower with changes in the range of -4.8 bps (5-yr). Peripheral spreads over the German 10-yr are for the first time showing a general widening trend, with Greece (+10 bps) underperforming. Italy widens up to 8 bps as a private rescue plan for the regional bank Carige is at risk of collapsing.

Uncertainty on the impact of the US raising additional tariffs extended the global risk-off correction resulting in further equity losses. US eco data were mixed but with little impact on the dollar. The trade tensions triggered a further decline in US yields. The interest rate differential between the US and Germany also narrowed substantially. However, as was the case earlier this week, the US-China trade story failed to set any directional trend in the major USD cross rates. The trade-weighted dollar is drifting sideways in the mid-97 area already for more than a week. The euro initially traded stable but started gaining traction as US dealings kick off, currently trading at 1.1240. USD/JPY (currently 109.80 area) is developing a cautious downtrend. The pair finally drifted below the 110 handle. Even so, yen gains remain modest considering the rise in global (stock market) volatility.

Sterling lost further marginal ground against the euro and the dollar. Talks between the government and the labour opposition on a Brexit deal continue today. However, Conservative party officials indicated that there is still quite some work to do. At the same time, Labour leader Corbyn indicated that the Conservative party still has to do major concession for talks to succeed. BoE’s Saunders said that interest rates will increase over time, but that it won’t be far or fast. So, overall today’s narrative wasn’t really supportive for sterling. EUR/GBP is trading in the 0.8615/20 area. Cable drifting below the 1.30 level.

News Headlines

The Norwegian Central Bank kept its policy rate unchanged at 1.0% as expected. However, the Norges Bank indicated that current outlook and the balance of risk suggests that the policy rate will likely be raised in June. The Norwegian crown rebounds slightly. EUR/NOK is trading in the 9.80 area.

The Central Bank of Turkey suspended its one week repo auction, raising funding costs for Banks. The bank said the decision was due to volatility in financial markets, but is probably also intended to ease pressure on the Turkish lira. For now, the impact is very limited with EUR/TRY trading near the 7.00 barrier, the weakest level in about 7 months.

US eco data published today were close to expectations. Headline final demand PPI rose 0.2% M/M and 2.2% Y/Y, slightly below consensus. The core measure excluding food, energy and trade was marginally higher than expected. The US trade March trade deficit ($50 bln) was bang in line with expectations. Weekly jobless claims (228K) rose slightly more than expected, but the level still suggests a healthy job market.

GBP/USD is unchanged on Thursday, after losing ground for three successive days. In the North American session, the pair is trading at 1.3008, unchanged on the day. On the release front, there are no British indicators. In the U.S., producer price index reports softened in April. PPI dropped to 0.2%, down from 0.6%. This matched the forecast. Core PPI dropped from 0.3% to 0.1%, shy of the estimate of 0.2%. Unemployment claims ticked lower to 228 thousand, higher than the estimate of 215 thousand. On Friday, the U.K. releases monthly and quarterly GDP reports, as well as Preliminary Business Investment. In the U.S., the focus will be on consumer inflation indicators.

What can we expect from the Federal Reserve, which has kept a low profile? At last week’s policy meeting, the Fed maintained its key interest rate and indicated that it was comfortable with current monetary policy and had no plans to raise or lower rates in the coming months. However, the U.S. economy has exceeded expectations, with a sparkling GDP of 3.2% in Q1, and a sharp nonfarm payrolls of 263 thousand. Will these sharp numbers make a rate hike more likely? The markets don’t think so. According to the CME Group, there is zero probability that the Fed will raise rates before 2020. Moreover there is a 60% likelihood that the Fed will cut rates before the end of 2019. This sentiment could weigh on the greenback, as rate hikes make the currency more attractive to investors.

The Bank of England has sent out a message of a bias towards tightening rates, but is anybody listening? Last week BoE Governor Mark Carney that current markets expectations of future rate hikes were too modest. This hawkish stance failed to catch the attention of investors and the pound didn’t jump at the BoE’s command. Instead, GDP/USD has declined 1.25% so far this week and is testing the symbolic 1.30 level. The BoE has raised its forecast for U.K growth to 1.5%, up from the previous forecast of 1.2% and inflation is hovering close to the BoE’s target of 2.0%. With these healthy numbers, investors are not expecting rate hikes anytime soon, especially with the lingering uncertainty over Brexit.

Daily Pivots: (S1) 109.90; (P) 110.10; (R1) 110.32; More...

USD/PY dips further to 109.60 so far today and intraday bias stays on the downside. Sustained break of 109.71 key support will confirm completion of rebound from 104.69 at 112.40 on bearish divergence condition in daily MACD. Deeper decline should then be seen back to retest 104.69 low. On the upside, though, rebound from current level and break of 110.28 minor resistance will mix up near term outlook. Intraday bias will be turned neutral in this case first.

In the bigger picture, USD/JPY is staying inside falling channel from 118.65. Thus, there is no confirmation of trend reversal yet. Sustained break of 109.71 will argue that rebound from 104.69 is completed. And the down trend from 118.65 is still in progress. But at this stage, in case of break of 104.69, we'd expect strong support above 98.9 (2016 low) to contain downside an bring rebound.

Risk aversion Dominates the market today as the world awaits a new "season" in US-China trade war drama. At this point, with Trump's hard line rhetoric, it's very doubt if Chinese Vice Premier Liu He could turn around the situation in his visit to Washington today. New rounds of tariffs will very likely take effect tomorrow, and China's retaliations would soon follow. After a few months of "recess", trade-war is going to escalate to another level.

In the US markets, DOW opens sharply lower and is trading down over -300pts at the time of writing. The strong break of 55 day EMA now serves as a strong warn of bearish reversal for the near term. 10-year yield is also back pressing 2.44. In the currency markets, Swiss Franc and Yen are naturally the strongest ones. Euro display much resilience as it's competing with Dollar as third strongest. Australian Dollar is the weakest one followed by Sterling and Canadian.

Technically, 0.6962 in AUD/USD is an immediate focus and break will resume recent fall from 0.7295. USD/CAD, with today's rise, could be challenging 1.3521 resistance too. Break will also resume recent rise from 1.3068. USD/PY is pressing 109.71 key support. Firm break there could trigger downside acceleration.

In Europe, currently, FTSE is down -0.55%. DAX is down -1.22%. CAC is down -1.58%. German 10-year yield is down -0.0195 at -0.062. Earlier in Asia, Nikkei dropped -0.93%. Hong Kong HSI dropped -2.39%. China Shanghai SSE dropped -1.48%. Singapore Strait Times dropped -0.43%. Japan 10-year JGB yield rose 0.0053 to -0.046.

US jobless claims dropped to 228k, trade deficit at USD -50B

US initial jobless claims dropped -2k to 228k in the week ending May 4, above expectation of 220k. Four-week moving average of initial claims rose 7.75k to 220.25k. Continuing claims rose 13k to 1.684M in the week ending April 27. Four-week moving average of continuing claims dropped -8k to 1.666M.

PPI rose 0.2% mom, 2.2% yoy in April, versus expectation of 0.2% mom, 2.3% yoy. PPI core rose 0.1% mom, 2.4% yoy, versus expectation of 0.2% mom, 2.5% yoy. Trade deficit rose 1.5% to USD 50.0B in March, better than expectation of USD -51.4B. Exports rose 1.0% to USD 212.0B. Imports rose 1.1% to USD 262.0B.

From Canada, new housing price index rose 0.0% mom in March, matched expectations. Trade deficit narrowed to CAD -3.21B in March, missed expectation of CAD -2.45B.

Released earlier, Japan consumer confidence dropped -0.1 to 40.4. UK RICS house price balance dropped to -23 in April. China CPI accelerated to 2.5% yoy in April, matched expectations. PPI accelerated to 0.9% yoy, beat expectation of 0.6% yoy.

China prepared to response to all possible outcomes of trade talks with US

Chinese Ministry of Commerce spokesman Gao Feng said in a regular briefing that “the U.S. side has given many labels recently, ‘backtracking’, ‘betraying’ etc … China sets great store on trustworthiness and keeps its promises, and this has never changed.”

Gao added, “we hope the U.S. can meet China halfway, take care of each others’ concerns, and resolve existing problems through cooperation and consultations” But he also said that “China’s attitude has been consistent, and China will not succumb to any pressure”. Gao warned “China has made preparations to respond to all kinds of possible outcomes.”

At a rally in Florida late yesterday, Trump accused that China “broke the deal” as the trade negotiations entered the final stage. And he pledged no to back down on tariffs unless China “stops cheating our workers”. He said, “I just announced that we’ll increase tariffs on China and we won’t back down until China stops cheating our workers and stealing our jobs, and that’s what’s going to happen, otherwise we don’t have to do business with them”. And, ‘They broke the deal,” he added. “They can’t do that. So they’ll be paying. If we don’t make the deal, nothing wrong with taking in more than $100 billion a year.”

Corbyn tells May to move red lines and give big offer on Brexit

UK opposition Labour Jeremy Corbyn said there is no big offers from Prime Minister Theresa May on Brexit yet. An he urged May to move her red lines.

Corbyn said “So far in those talks there’s been no big offer and the red lines are still in place.”  “Its actually quite difficult negotiating with a disintegrating government, with cabinet ministers jockeying for succession rather than working for an agreement.”

“Quite honestly, the government has to move its red lines. We cannot go on having MV1, MV2, MV3 and then coming on for possibly MV4 or a bill we have yet to actually see" he added.

May's spokesperson said there are significant work to do to reach a unified way forward to break a parliamentary impasse over Brexit. And the government is working hard to introduce the Brexit Withdrawal Agreement bill as soon as possible.

Kuroda: BoJ won’t do anything on exchange-rate, it’s MOF’s job

BoJ Governor Haruhiko Kuroda told parliament today that the biggest factor on markets’ trust in Yen is BoJ’s commitment to price stability. He said “currency rates move on various factors, so it’s hard to judge market trust in the yen by looking at exchange-rate fluctuations alone.” Instead, “confidence in the central bank’s policy is a big factor behind market trust in the country’s currency”.

Kuroda also said BoJ is watching exchange-rate moves carefully. However, currency policy falls under the jurisdiction of the Ministry of Finance. Thus, “BOJ would not do something for exchange-rate stability”.

RBNZ Orr: Get ahead of the curve with this week’s rate cut

RBNZ Governor Adrian Orr toned down the chance of another rate cut after yesterday’s, as he addressed a parliamentary committee today. He noted that “at the moment we see in the outlook for interest rates as…balanced”. Regarding yesterday’s cut, Orr pointed out that “the reason for the cut is global economic growth has slowed.” “Growth has come off rapidly in Europe, in China, though that’s stabilized more recently, and Australia … so key trading partners.”

Separately, Orr also told the Morning Report that the cut was “sensible” as our “forward projection [showed] a lower rate. And the question for the committee was “do we wait or do we move now”. Orr said “Moving now is the best choice for us as far as we consider because it means we get ahead of the curve – we aren’t chasing the economy in cycles, we’re actually getting ahead and removing the cycles.”

USD/JPY Mid-Day Outlook

Daily Pivots: (S1) 109.90; (P) 110.10; (R1) 110.32; More...

USD/PY dips further to 109.60 so far today and intraday bias stays on the downside. Sustained break of 109.71 key support will confirm completion of rebound from 104.69 at 112.40 on bearish divergence condition in daily MACD. Deeper decline should then be seen back to retest 104.69 low. On the upside, though, rebound from current level and break of 110.28 minor resistance will mix up near term outlook. Intraday bias will be turned neutral in this case first.

In the bigger picture, USD/JPY is staying inside falling channel from 118.65. Thus, there is no confirmation of trend reversal yet. Sustained break of 109.71 will argue that rebound from 104.69 is completed. And the down trend from 118.65 is still in progress. But at this stage, in case of break of 104.69, we'd expect strong support above 98.9 (2016 low) to contain downside an bring rebound.

Economic Indicators Update

Entering into US session, Swiss Franc and Yen are the strongest ones for today so far as risk aversion dominates. DOW future is pointing to another gap down in US markets. Chinese Vice Premier Liu He will try to save the trade deal in Washington as new round of tariffs loom tomorrow. The France is give an additional lift on weakness in both German yield and China Yuan. Euro, remains rather resilient though.

On the other hand, Australian Dollar is the worst performing one for today, followed by Canadian and then Sterling. In particular, the lift from RBA's standing pat earlier this week was rather brief. AUD/USD looks set to break through 0.6962 low soon, should trade war escalation materializes.

In Europe, currently:

• FTSE is down -0.75%.
• DAX is down -1.20%.
• CAC is down -1.56%.
• German 10-year yield is down -0.019 at -0.061.

Earlier in Asia:

• Nikkei dropped -0.93%.
• Hong Kong HSI dropped -2.39%.
• China Shanghai SSE dropped -1.48%.
• Singapore Strait Times dropped -0.43%.
• Japan 10-year JGB yield rose 0.0053 to -0.046 l

UK opposition Labour Jeremy Corbyn said there is no big offers from Prime Minister Theresa May on Brexit yet. An he urged May to move her red lines.

Corbyn said “So far in those talks there’s been no big offer and the red lines are still in place.” “Its actually quite difficult negotiating with a disintegrating government, with cabinet ministers jockeying for succession rather than working for an agreement.”

“Quite honestly, the government has to move its red lines. We cannot go on having MV1, MV2, MV3 and then coming on for possibly MV4 or a bill we have yet to actually see" he added.

May's spokesperson said there are significant work to do to reach a unified way forward to break a parliamentary impasse over Brexit. And the government is working hard to introduce the Brexit Withdrawal Agreement bill as soon as possible.

The US 30 stock index has declined over the last three consecutive days after it reached another all-time high of 2960.48. Currently, the price is meeting the 2860 support area, which overlaps with the 50-day simple moving average in the daily timeframe, slipping beneath the red Tenkan-sen and the blue Kijun-sen lines. The bearish correction picture in the medium term is further supported by the MACD, which is falling below its red signal line and the stochastic oscillator is moving towards the oversold territory.

Should prices move lower, support could come at the 23.6% Fibonacci retracement level of the upleg from 2332 to 2960.48 around 2813. Below that, the 2784 is another major support before touching the 200-day SMA near 2775.

To the upside, resistance is coming from the all-time high of 2960.48, while above that, the next major obstacle to watch is the 3000 handle.

Summarizing, in the near-term, the momentum indicators point to a possible bearish retracement, however, the index is still creating higher highs and higher lows over the last four months, which augurs well for the medium-term.

Canada’s Mar international merchandise trade:

• Trade Balance: -C$3.2B vs. -C$2.4Be
• Exports: C$49B vs. C$48.0B prior
• Imports: C$52.3B vs. C$50.9B prior
• Trade Balance with U.S: C$3.6B vs. C$3.6B prior
• Trade Balance rest of the world: -C$6.8B vs -6.4B prior

Note: Prior deficit revised worse from -C$2.9B to -C$3.42B

Canada’s trade deficit with the rest of the world narrowed in March on the strength of a broad-based gain in exports.

Canada posted a merchandise trade deficit with the rest of the world of -C$3.21B. Market expectations were for a -C$2.4B deficit. The previous month’s trade deficit was revised higher, to -C$3.42B, because energy exports didn’t increase as much as anticipated.

The March report indicated exports rose +3.2% on a month-over-month basis, while imports climbed +2.5%.

CAD is currently trading at the low of the day outright to the USD at C$1.3495 and is looking to breach the psychological C$1.3500 handle in risk aversion trading.

Chinese Ministry of Commerce spokesman Gao Fend said in a regular briefing that “the U.S. side has given many labels recently, ‘backtracking’, ‘betraying’ etc ... China sets great store on trustworthiness and keeps its promises, and this has never changed.”

Gao added, “we hope the U.S. can meet China halfway, take care of each others’ concerns, and resolve existing problems through cooperation and consultations"

But he alsosaid that “China’s attitude has been consistent, and China will not succumb to any pressure". Gao warned “China has made preparations to respond to all kinds of possible outcomes.”

US initial jobless claims dropped -2k to 228k in the week ending May 4, above expectation of 220k. Four-week moving average of initial claims rose 7.75k to 220.25k.

Continuing claims rose 13k to 1.684M in the week ending April 27. Four-week moving average of continuing claims dropped -8k to 1.666M.

PPI rose 0.2% mom, 2.2% yoy in April, versus expectation of 0.2% mom, 2.3% yoy. PPI core rose 0.1% mom, 2.4% yoy, versus expectation of 0.2% mom, 2.5% yoy.

Trade deficit rose 1.5% to USD 50.0B in March, better than expectation of USD -51.4B. Exports rose 1.0% to USD 212.0B. Imports rose 1.1% to USD 262.0B.