- Trade frictions between the US and China came under the spotlight after China announced it would take retaliatory measures following the US decision to impose new tariffs of 10% on $200 billion worth of imports from China. Moreover, the increase in China’s trade surplus did not help to reduce tensions. However, trade strains had only a mild impact on financial markets this week, with commodity prices suffering the main negative impact, while Chinese equities rose on the prospect of trade talks between China and the US to counteract increasing strains.
- Nonetheless, trade concerns kept the US 10Y yield broadly steady, although the 2Y yield increased, underpinned by firm June inflation in the US, coupled with comments from the Fed’s Chair supporting a gradual tightening cycle. As a result, the US yield curve continued to flatten. The sovereign yield also remained steady in Germany, while yields declined on the periphery, led by Italy after its finance minister reinforced its commitment to following EU fiscal rules at yesterday´s Eurogroup meeting. In this context, peripheral risk premia narrowed across the board.
- In FX markets, the US dollar appreciated against other major G-10 currencies, with both the Euro and the Japanese yen declining. Regarding EM markets, the Chinese renminbi slightly extended its depreciation, due to heightening trade concerns, driving Asian currencies slightly lower. On the other hand, Latam currencies were broadly steady, with the ARS recovering some ground after the sharp decline, while the MXN remained steady, after last week’s sharp appreciation. Idiosyncratic factors dragged the TRY down.
- Commodity markets registered the main negative impact of trade tensions. Both metal and agricultural commodities declined sharply this week, while oil prices declined as Libya resumed normal oil production.
- Equity markets rose across the board, with some exceptions, underpinned by expectations of positive 2Q18 company earnings results. Expectations that China may slow down its deleveraging process may also have helped to support equity markets.
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