Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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Another day, another White House resignation and markets go topsy-turvy all over again. The resignation of Gary Cohn, President Trump's top economic adviser, removes "the last bulwark for free trade in the White House" and increases the likelihood of an all-out trade war between the US on one side and virtually the whole world on the other.
"This really raises the temperature," says John Hardy, Saxo Bank's head of FX strategy; "the administration is reported to be readying a broad range of tariffs on imports from China." And how should traders and investors respond to these threats? "We really need to stay on our toes, be careful and potentially consider options and options spreads as a way to trade developments," is Hardy's advice.
As has been seen since the tariffs first raised their ugly head last week, the Canadian dollar is taking the brunt of the heat. "The protectionism from Trump and all the noise about NAFTA are not very supportive at all and we have CADJPY, the poster child of opposing directional developments with both currencies repricing in opposite directions," Hardy says.
However, though we've seen the Canadian dollar absorb a lot of negativity, the rate outlook from the Bank of Canada hasn't fallen much, says Hardy, adding that he expects the central bank to be very cautious and their next policy meeting.
What's going to happen next? Hardy says that we should watch out for ad hoc headlines upsetting markets and Peter Garnry, Saxo's head of equity strategy, says the next battle will likely be specifically China-focused.
"Right now we're waiting for the tariffs to be enacted and then for the response from the EU and China," says Saxo's equities head. After that will be intellectual property rights – IP theft. "A report from the US Trade Representative’s office is expected soon. The report is likely to hand Trump more ammunition for more tariffs directed against China," Garnry says.
For equity markets this means that sideways is the prevailing direction for Q1 and Q2 though there will be opportunities for active investors, and technology is a good place to start looking as this sector is more robust that physical goods.
Finally, oil is trading lower after API reported a bigger-than-expected stock build and weaker stocks following Gary Cohn’s resignation, reports Ole Hansen, Saxo's head of commodity strategy.
As well as the looming trade war, the oil market's focus is on #CERAWeek in Houston and EIA’s weekly inventory report at 15:30 GMT today. And gold is being supported by the risk of a trade war but struggling after finding resistance at $1340/oz (61.8% of the February selloff).
"We maintain a bullish view based on gold's diversification credentials," Hansen says.
Quarterly Outlook
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Quarterly Outlook
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