Market Comment | Markets remain fragile as US-China tech war worsens trade deal prospects

  • US ‘blacklisting’ of China’s technology major Huawei further undermined the frayed US-China relationship while dimming prospects of a trade deal. Markets got skittish as Google interrupted the delivery of critical software and technical services to Huawei, enabling only the use of the public version of Android. Moreover, all US chip makers have suspended the supply of key software and components until further notice. Analysts assert that this action could paralyse Huawei’s smartphone and equipment business.
  • Meanwhile, economic activity disappointed in the US. Chicago Fed national activity index declined more than expected in April (-0.45%, consensus -0.2%, previous+0.05%). Risk indicators implied by financial markets bounced back. Equity volatility picked up while implied volatility in bond markets remained elevated. Equity prices declined across the board, led by the technology sectors.
  • Nonetheless, China’s RMB remained stable but close to the psychological level of USDCNY 7. Interestingly, the onshore yuan strengthened slightly against the dollar, after the PBOC set a stronger-thanexpected fixing, confirming that the PBoC would not allow the currency to breach USDCNY 7 level. Stability on RMB help anchor other FX markets in the region. The US dollar inched down, probably while the rest of main G-10 appreciated slightly. EM currency were mixed but without significant movement, except the COP which depreciated 1% after the consumer sentiment declined, falling into negative territory.
  • Bond markets remained steady, However, caution mood in financial markets has kept safe-have yield contained at current low levels. Peripheral risk premia have remained contained, although Italy’s risk premium slightly widened on ongoing concerns about the fiscal consolidation slippage.
  • Commodity prices were mixed. Oil prices rebounded (Brent $73 per barrel; +1%) on the back of geopolitical concerns and the OPEC+ decision to maintain production cuts. Meanwhile growth concerns, due to trade frictions, weighed on metal commodity prices.

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