Yield Curve Inverts But 'Beautiful Letter' Keeps Deal Hope Alive Despite Tariff Increase

Global equity markets were mixed as investors digested the latest headlines from the US – China trade talks. Asian markets pared earlier gains, European bourses are pointing to a stronger open, whilst US futures head south. The mixed response from the market reflects the mixed messages coming from the White House.

Talks between the US and China have reportedly yielded little to no progress. Trump has escalated the trade war by going ahead and increasing tariffs on Chinese imports to 25% as threatened, which has set the stage for a tense final day of talks.

The market’s reaction has not been all doom and gloom. We are not seeing see the same risk off reaction that we have seen in previous sessions. The fact that the two sides have agreed to continue negotiations on Friday is offering a glimmer of hope that the relationship between the two powers hasn’t deteriorated beyond repair. Markets are also clinging to Trump’s comments over a “beautiful letter” from Chinese President Jingping Xi and an expected phone conversation between the two leaders.

The high levels of volatility that we have seen is stemming almost entirely from Trump's comments and actions over China. Traders continue to swing from tweet to headline to comment to tweet as they try to make sense of the mixed messages.  Global stocks are heading for the worst week in since December and 10year US treasury yields dropped below the 3-month yields, the first inversion of the yield curve since March.  

No deal yet but motivation to keep talking

We think its clear that there will be no deal at the end of this round of talks. The best we can hope for at this stage is an agreement for the sides to keep talking. But with tariffs now at 25% both sides will want to see things progress more quickly. Let’s not forget higher tariffs on Chinese imports will get passed on to the US consumer, who will end up paying more. This is not the legacy that Trump is after, he will want to see the China deal tied up quickly before US economic data takes a hit.

Gold cautiously higher

Gold moved tentatively higher in early trade on Friday. Investors are buying into the safe haven as Trump’s tariff increases cast a shadow over the future global economic outlook. The global economy is in a fragile position as slowing global growth fears still linger. This latest move by Trump could accelerate any downturn and investors want to be protected from this. We could see gold continue to advance back towards $1300 over the coming session.

UK GDP to support GBP?

In the FX markets the dollar remained stable versus a basket of currencies. The pound was testing $1.30 as investors look towards UK GDP data later this morning. Expectations for growth of 1.8% year on year in the first quarter, if met could offer the pound some support amid Brexit uncertainty.