Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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NY Open: Waiting for the other shoe to drop
Michael O’Neill
FX Trader, Loonieviews.net
Summary: President Trump's tariffs, and Beijing's initial response, are being largely shrugged off by US markets in the wake of the New York open. The US president, however, has signalled that there may be more to come.
China said it would respond to new US trade tariffs and it did. Beijing plans to levy tariffs of 10% on $60 billion worth of US imports effective September 24. The ball is back in President Trump’s court. He threatened additional tariffs on another $2,267 billion of imports if China retaliated. It did, and now markets will wait for the other shoe to drop.
Trump is already setting the stage for his next act. At around 13:00 GMT he tweeted "China has openly stated that they are actively trying to impact and change our election by attacking our farmers, ranchers and industrial workers because of their loyalty to me. What China does not understand is that these people are great patriots and fully understand that... China has been taking advantage of the United States on Trade for many years. They also know that I am the one that knows how to stop it. There will be great and fast economic retaliation against China if our farmers, ranchers and/or industrial workers are targeted!"
Wall Street doesn’t appear to be bothered by the fresh round of trade hostilities. Markets, however, may be overly complacent in viewing the initial 10% tariffs as just a bargaining ploy ahead of the nastier 25% tariffs that come into effect on January 1, 2019. The three major indices are well-in positive territory. Even Apple has ticked higher as Apple products were exempted from tariffs, for now.
FX traders seem to have dismissed concerns about elevated trade tensions as there isn’t any evidence of risk aversion trading. The US dollar has edged lower against the major G-10 currency pairs except against the Japanese yen and New Zealand dollar.
USDJPY traders are focused on the rise in 10-year Treasury yields above 3.0% to 3.018 as of 1345 GMT. A break above 112.20 targets 112.60. EURUSD climbed from 1.1675 at the New York open to 1.1723 before easing back to 1.1710.
USDCAD traded lower alongside the broad US dollar weakness. Prices were undermined by the mix of "as expected" Manufacturing Shipments data and news that Canada Foreign Minister Chrystia Freeland is returning to Washington on Wednesday for more trade talks.
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