Risk appetite deteriorated further on Monday as China retaliated with additional tariffs on US exports.

Posted: 14th May 2019

Daily market report May 14th 2019

Market highlights

EUR/USD

Global trade issues again dominated price action during Monday, especially with a potential announcement this week on whether the US will impose tariffs on EU car exports. German yields declined slightly on the day, although there was a narrowing of yield spreads with the US which helped underpin the Euro.

The single currency also gained some support from the strong current account position, especially with the potential for a closing of global carry trades funded through the Euro while the dollar was hampered by concerns that there would be damage to the US economy. The Chinese yuan weakened sharply with the sharpest 1-day decline since August 2015 which continued to unsettle confidence.

Boston Fed President Rosengren stated that he was surprised that the US economy was not seeing much inflation at all. Minneapolis head Kashkari stated that the fundamentals of the real economy appear healthy while inflation should be left to build.

Given trade fears, there was a shift in Fed Funds future contracts early in US trading with the chances of a 2019 rate cut increasing to around 70% from 60% late last week. After a significant retreat, the dollar regained ground later in the session with EUR/USD retreating from highs near 1.1260 while the US currency drifting lower on Tuesday amid indecision.

USD/JPY

Rhetoric from President Trump remained uncompromising on Monday with comments that China will be hurt badly if it does not make a deal. Early in the New York session, China announced that it would raise some tariffs on US goods from June 1st. There would be tariffs of 25% on goods valued at $60bn with smaller levies in other sectors. There were also reports that China might stop purchasing US agricultural and energy goods.

Treasuries rallied again with the 10-year yield declining to 6-week lows just below 2.40% at one stage and equity markets lost further ground. In this environment, the yen continued to gain defensive support and USD/JPY declined sharply to near 109.00 as fears over the global economy increased.

Treasury Secretary Mnuchin stated that trade talks were still going on which rescued sentiment to some extent and Trump also stated that there was no decision yet on whether to push ahead with additional tariffs.

Comments from the Finance Ministry will be watched closely, especially with a weaker yuan undermining Japan’s competitive position and increasing pressure for a weaker yen. Bank of Japan Governor Kuroda stated that the bank will consider more easing if price momentum is lost. Asian equity markets declined on Tuesday, but US futures corrected higher which provided some relief and President Trump was more optimistic over trade talks which pushed USD/JPY to the 109.65 area.

Sterling

Bank of England Deputy Governor Broadbent reiterated that any interest rate increases will be gradual which was in line with recent comments from officials. There were no substantive political developments during the day with pressure for Brexit talks between the government and Labour Party to be culled. Prime Minister May indicated that a series of indicative parliamentary votes could be held if talks fail to make headway. Overall, global trade issues and risk conditions dominated the UK currency.

Sterling was resilient during the European session, but there was significant selling in New York as global trade fears sapped confidence. The UK currency dipped to 2-week lows with GBP/USD below 1.2950 as EUR/GBP advanced to highs around 0.8680.

Latest labour-market data will be released later, although risk conditions are likely to dominate unless there is a big surprise within the data and Sterling made no impression in early Europe as GBP/USD traded just above 1.2950.

Swiss franc

The Swiss franc secured renewed support on defensive grounds during Monday as global equity markets dipped sharply and key bond yields declined in response to US-China trade fears.

EUR/CHF retreated sharply to 1-month lows just below 1.1300 while USD/CHF hit 4-week lows near 1.0050.

Markets will be monitoring National Bank rhetoric closely in the short term given the intervention possibility. Risk appetite stabilised on Tuesday with the franc registering only slight losses as underlying caution prevailed amid fears over growth conditions.

AUD/USD + USD/CAD

The further deterioration in risk conditions had an important impact in undermining the Australian dollar in US trading on Monday. As the US dollar regained ground AUD/USD declined sharply to 4-month lows around 0.6940.

There was a small increase in the NAB business confidence index, although components were generally fragile. The Australian dollar edged higher as risk conditions stabilised, but gains were limited to just above 0.6950.

The Canadian dollar was also hurt by weaker risk appetite and a sharp reversal in oil prices with USDCAD advancing to highs around 1.3480. Oil prices recovered slightly on Tuesday with USD/CAD settling around 1.3470.

NOK+ SEK

Scandinavian currencies were again hampered by fears over trade policies and the global growth environment, although the pressure was countered by support on valuation grounds.

Riksbank member Ohlsson stated that inflation is picking up in Sweden and that it is time to ease off on the gas pedal in regards to stimulating the economy.

After posting fresh 9-year highs near 10.85, EUR/SEK retreated to 10.81 with little change on Tuesday with USD/SEK above 9.60.

Latest Swedish inflation data will be released on Tuesday with the core rate expected at 1.9% from 1.8%.

The Norwegian krone gained some initial protection from higher oil prices, although crude retreated sharply into negative territory for the day which triggered renewed krone losses in choppy trading.

From highs near 9.85, EUR/NOK declined slightly to the 9.82 area with USD/NOK around 8.74 with further volatility likely.

Equities

Euro-zone equities opened lower on Asian losses and continued to lose ground during Monday as trade fears dominated.

The German DAX index declined 1.5% amid fears over the outlook for German exports while the Eurostoxx 50 index declined 1.2% to 6-week lows.

Global trade and growth fears also undermined UK equities, although there was some cushioning from higher oil prices with a 0.5% decline in the FTSE 100 index.

US equities were inevitably damaged by trade fears after China announced retaliatory measures with concerns over damage to the growth and earnings outlook. The S&P 500 index declined 2.4% to 6-week lows, although futures did recover ground on Tuesday.

Asian markets registered significant losses, although US futures gains and stabilisation in risk pulled markets away from intra-day lows.

Japan’s Nikkei 225 index declined 0.45% with a 0.9% decline for the Australian ASX index.

China’s Shanghai index pared losses in late trading amid further evidence of official support, although it was still in negative territory, while Hong Kong’s Hang Seng index traded 1.6% lower after being closed on Monday.

Commodities

Oil prices were hampered by underlying concerns over US-China policies and potential damage to global demand.

Crude was underpinned by tensions in the Middle East, especially after further reports of damage to ships close to the Straits of Hormuz.

WTI pushed above the $63.0 p/b level before reversing sharply as risk appetite deteriorated again. As equity markets declined sharply, WTI dipped below the $61.0 p/b level as risk conditions slumped. There was a tentative recovery to around $61.25 on Tuesday with Brent around $70.55 p/b.

Gold was boosted by a fresh slide in risk appetite. Gains accelerated as the dollar declined and gold was resilient even when EUR/USD retreated.

Overall, spot prices pushed above $1,300 for the first time in over 4 weeks and it consolidated just below this level on Tuesday with silver trading around $14.80 per ounce as global growth fears undermined sentiment.

Cryptocurrencies

Cryptocurrency sentiment remained extremely strong on Monday with very sharp gains across major coins. After initial stabilisation close to $7000, bitcoin advanced very strongly to the $8000 area late in the New York session.

There was further evidence of buying as an alternative to traditional assets given the slide in risk appetite with Asian investors notably active. Bitcoin has also tended to gain during the Consensus conference currently underway.

There was only a limited correction on Tuesday with bitcoin just above $8000 after a 9-month peak on Monday.

Ether under-performed bitcoin, but moved to 6-month highs around $210 on Tuesday.

Calendar

Major events for the day ahead: (times in BST)

09.30: UK labour market data

10.00: German ZEW survey

03.00 (Wed): China industrial production