Investors flee to safe havens as China retaliates

Global core bonds spurred higher yesterday with a clear outperformance of US Treasuries. Market sentiment was grim at the start of the week as the US and China had raised the ante over the weekend after the US tariff increase on Friday. Investors turned to safe haven assets, including core bonds. Just before the US opening bell, China announced it would retaliate by targeting $60bn of US imports. Some local Chinese media added that China, a large and important purchaser of US public debt, is discussing the possibility of dumping US Treasuries. US equities fell at the opening and eventually closed yesterday's session with losses around 2‐3%. The US yield curve moved lower with yield changes varying between ‐5.1 bps (30‐yr) and ‐8.0 bps (5‐yr). Outperformance at the short‐end of the curve indicates investors are expecting the Fed to lower its policy rate sooner rather than later. The Fed funds futures fully priced in a cut by Q1 next year. Meanwhile, the EU is preparing a list of possible US goods to slap tariffs on in case the US imposes levies on car imports. The German yield curve bull flattened with changes up to ‐3.8 bps (30‐yr).

Risk‐off continues across Asia overnight, although with clear signs of moderation. US President Trump said he will know more in three or four weeks if China talks are leading somewhere but added that he think's "it's going to be very successful". Both US Treasuries and German Bunds are cautiously retreating this morning, but the jury is still out.

The trade story will continue to dominate trading today. The US walking the talk is the last thing the fragile global economy can use right now. The increase of US tariffs and China immediately retaliating suggests a deal is not to be expected short‐term. We hold our positive bias towards core bonds. The correction lower on stock markets has room to go further. Today's eco calendar will have to take investors off‐guard to play a role. The US prints NFIB Small Business Optimism for April, while the UK prints March labour data. Germany releases the ZEW survey results and the April Final CPI. Sweden publishes inflation data (April). Fed's Williams and George take the stance.

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).

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