This week’s risk sentiment worsened with today’s announcement from China of retaliatory tariffs on another $75b worth of U.S. goods. Global stocks edged up as strong U.S. retail earnings and hopes of a more stable government in Italy outweighed the escalation of trade tensions.

On the trade front, earlier this week, the U.S. granted Huawei another 90 days to buy from American suppliers. However, today China announced new tariffs on 75b worth of U.S. goods which will be effective in two batches, on September 1 and December 15, including agricultural products, crude oil, small aircraft and cars.

Mixed news on the data front: Concerns over a global slowdown were reinforced by weak manufacturing data around the world, both U.S. and the Eurozone flash manufacturing PMI in contraction levels, alongside more pessimistic consumers in the Eurozone. However, U.S. labor-market and existing home sales strengthened.

The minutes of the Fed’s July meeting showed that the decision to cut rates by 25 bps was not unanimous as several members did not support it. In this context, investors’ expectations of an aggressive rate cut in September eased but expectations of additional rate cuts by the end of the year persist. Powell said the U.S. economy is in a favorable place with current U.S. expansion entering its 11th year but faces significant risks. Elsewhere, the ECB minutes from July’s meeting suggested a broad stimulus package next month, which could include rate cuts and asset purchases, instead of a gradual approach. A 10 bps ECB depo rate cut is a virtual certainty but expectations of 20 bps depo rate cut declined.

Safe debts were in demand today driven by the trade war escalation and Powell’s statement at the Jackson Hole gathering that the Fed will act as appropriate to sustain the expansion. Nonetheless, sovereign bonds dropped in general this week, except for Italy, as expectations of an aggressive rate cut faded supported by less dovish-minded comments from Fed officials. The 10Y German bund yield edged up by 2 bps., while the 10Y U.S. Treasury yield inched down by 0.9 bps. The 10-2Y slope continue to flatten as the 2Y U.S. Treasury yield rose significantly by 5.3 bps. with the 10Y U.S. Treasury yield briefly falling this week below 2Y yields. Regarding peripheral bonds, Italy’s risk premium narrowed sharply by 11 bps after the resignation of its PM Conte as hopes of a more stable government coalition increased. However, the risk premia in Spain and Portugal widened.

The DXY index dropped after the Powell’s speech at the Jackson Hole gathering. The JPY gained on safe haven appeal, alongside the euro which, erasing early losses driven by its muted private sector. However, the pound outperformed other G10 peers as Brexit deal hopes rise following Boris Johnson's meetings in Paris and Berlin. In EM, the FXJPEMCS index slipped with Latam currencies declining across the board. Moreover, the Chinese Yuan dropped to a 11-year low against the dollar with the CNY+12M futures edging up amid trade uncertainty.

In commodities, investors sought shelter in gold, the prices of which trimmed early losses amid trade uncertainty. Meanwhile, oil prices reverted their gains as concerns over a decline in demand driven by slowing economic outweighed the drop in the U.S. crude inventories.

Global stocks rebounded from the drop of last week but trimmed early gains after Trump said he will respond to the latest round of Chinese tariffs later today. Utilities and consumer discretionary led the gains this week in the S&P500 amid strong U.S. retail earnings. Equity implied volatility are at levels below 20.

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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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