Cautiousness key as trade spat simmers

Global core bonds closed Friday's session with gains with German Bunds outperforming US Treasuries.  Risk-off prevailed on financial markets in early trading, as Chinese state-owned media signalled a lack of interest to continue trade talks with a " US tariff gun" pointed at their head. Global core bonds jumped higher on the news and continued an upward bias as the day went by. Ahead of the WS opening, comments by US president Trump turned the tide. He confirmed earlier rumours that the US will delay the decision to impose auto tariffs by 6 months, avoiding a trade dispute with important allies (the EU, Japan). Core bonds started to pair intraday gains with an unexpectedly strong University of Michigan sentiment adding to losses. The forward-looking component of the confidence gauge rose from 87.4 to 96.0 in May, a 15-year high. The US yield curve flattened with changes in the range of -0.8 bps (30-yr) to +0.7 bps (2-yr). The German yield curve edged modestly lower with losses up to -0.9 bps (10-yr). Peripheral spreads over the German 10-year yield cautiously tightened with Greece (-3 bps) outperforming.

Asian markets are trading mixed this morning as investors remain cautious as they await the next update in the US-Sino trade dispute. Australian and Indian indices are outperforming following local elections. Japan's economy unexpectedly grew in the first quarter, beating consensus. However, a look under the hood shows that that the Japanese economy is less robust than the headline result would suggest. Core bonds edge cautiously lower this morning, but we remain careful and uphold our upward bias.

The trade story could temporarily shift to the background with the EU and Japan excluded from Trump's auto tariffs for at least 6 months. The US and China raised tariffs on each other's import, but didn't schedule a new date to continue negotiations. Today's eco calendar is close to empty and is thus not expected to offer investors much guidance. Catching our eye for the eco calendar for the rest of the week are the May Markit PMI's for the eurozone and the May German IFO expectations, both scheduled for Thursday. Moreover, the UK prints consumer inflation data (Wednesday) and investors will keep an eye on the meeting minutes of the Fed (Wednesday) and the ECB (Thursday) for more clues on future policy. Long term view: markets concluded that the ECB missed out on this cycle. They even start pondering the possibility of an additional deposit rate cut. The downtrend in the German 10-yr remains in place so far. Regarding Fed policy, markets are now largely discounting a Fed rate cut by December. The US 10-yr yield earlier this month temporary returned above the lower bound of the previous 2.5%-2.79%. However, the cycle low (2.34% is again on the radar).

Download The Full Sunrise Market Commentary