• Safe-haven bond yields continued to trend lower, dragged by the ongoing US-China trade strains, alongside the release of a gloomy business survey in Europe and increasing anxiety over a no-deal Brexit.
  • Since US-China trade friction escalated, optimism about a potential trade deal has waned, especially after no further trade talks between China and the US have been scheduled since the last round ended on May 10th, when US hiked tariffs on $200 bn Chinese goods. Moreover, the US Treasury Secretary Mnuchin noted that he is not planning to visit China again, saying Trump and Xi Jinping may meet at the end of June on the sidelines of the G20 summit.
  • Meanwhile, the Fed minutes confirmed that the Fed members do not want to act in hastily, suggesting they support patience on rate moves for ‘some time’. Moreover, the Fed minutes seem to backing Powell’s view that low inflation is ‘transitory’.
  • The risk is that the polarization of Brexit debate could lead to corner results. In UK MP May “new and improved” Brexit was reviled by Eurospectic Tories as a sellout to Labour, while it seems to be too minimal to win over the opposition Remainers. May now faces growing pressures to pull bill voting and resign within days. The risk is that the polarization of Brexit debate could lead to corner results
  • The European economic data disappointed. The Eurozone Manufacturing PMI declined in May against consensus expectations of an increase (47.7, consensus 48.1, previous month 47.9), as did European Services PMI (52.5, consensus 53, previous moth 52.8). German business confidence also came in weaker than expected (IFO business climate 95.3, consensus 95.0, previous month 95.3), casting a shadow over recent recovery in economic indicators.
  • ECB minutes confirmed the recent dovish tone, as the ECB considers that inflation remains too low, amid falling inflation expectations. Regarding growth, the ECB acknowledged the extension of the slower growth momentum but it also considered that recent data has improved, showing more solid growth, in line with the baseline scenario. Regarding TLTRO-III, members suggested that its pricing should warrant it use as a backstop, providing insurance in times of elevated uncertainty.
  • Sovereign bond yields extended declines on the back of increasing risk-off mood in financial markets,with falls in both the US and UK yields outpacing the decline across their peers, while it risk premia inched up slightly in peripherals, while HY spreads also widened slightly. Market implied probability for a rate cut in 2019 remained broadly increased to 80%, while the probability of an additional cut in 2020 rose to 69%, due to the sharp fall in equity markets.
  • In FX markets investors sought shelter in both the JPY and the CHF, whereas the GBP and cyclical currencies underperformed. EM currencies have remained under pressure, with the CNY continuing to sliding back although the PBoC set a stronger-than-expected fixing.
  • Equity markets declined sharply across the board, led by the cyclical sectors, while implied market volatility bounced back.
  • The falls across commodity prices, especially oil and industry metal commodities, underscored market concerns about the impact of the ongoing trade friction on global growth. Oil prices have slumped today.

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This document was prepared by Banco Bilbao Vizcaya Argentaria’s (BBVA) Research Department on behalf of itself and its affiliated companies (each a BBVA Group Company) for distribution in the United States and the rest of the world and is provided for information purposes only. The information, opinions, estimates and forecasts contained herein refer to that specific date and are subject to changes without notice due to market fluctuations. The information, opinions, estimates and forecasts contained in this document have been gathered or obtained from public sources believed to be correct by the Company concerning their accuracy, completeness, and/or correctness. This document is not an offer to sell or a solicitation to acquire or dispose of an interest in securities.

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