Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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Global markets are reeling this morning after the US president trumped his previously announced tariffs on $50bn worth of Chinese imports with the threat of another $200bn worth should the Chinese retaliate with penalties of their own on his initial levies. The heightened fear of a full-blown trade war has slammed into equities and EM currencies with the usual safe-haven assets – gold, core bonds and the yen and the Swiss franc – gaining.
"So finally this trade war theme is showing a more significant spike in volatility but the general market response [to the initial tranche of tariffs] has been somewhat muted if we look at equities and the forex space though we've seen some signs of stress in corporate credit and emerging markets," says John J Hardy, Saxo's Head of FX Strategy. Overnight, though, it's become far more serious: "This is going a little bit more across the board and it's hard to see how we can back down easily from this situation and the positions that both China and Trump have staked out." The Japanese yen has reverted to its traditional behaviour of spiking when risk aversion sweeps over markets and is well ahead against the dollar.
Asian equities were one of the severest casualties of the carnage with the Shanghai Composite plunging over 4%, the Hang Seng losing over 3% and big losses virtually everywhere in the region. "We remain negative on emerging markets and obviously China is part of that category," says Peter Garnry, Saxo's Head of Equity Strategy.
Elsewhere in the equity space and regarding what further fallout we may face from Trump's trade war, Garnry points to US semiconductors as this extremely globalised industry would face disruption to its supply chain, and hence its production capacity.
Gold is making good progress but it's not a one-way stream here, as Ole Hansen, Saxo's Head of Commodity Strategy, points out. "It's a battle between geopolitics and poor technicals for gold though gold has risen from the ashes from Friday's washout. "The continued focus on trade protectionism trumps a weak technical outlook and worries about a stronger dollar, he explains. "A rise above $1288/oz would likely signal renewed risk appetite."
As regards the technical analysis picture, "Euro-Swiss is selling off nicely so we have a could have a new low and possibly even a test of the support level going back to August of last year," says Kim Cramer Larsson, a Saxo technical analyst.
Quarterly Outlook
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Quarterly Outlook
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