Trade war seesaw; Taking stock of rates


No breakdown or breakthrough in China-US trade talks. Asia rates have held up well.
Philip Wee, Eugene Leow27 Aug 2019
    Photo credit: AFP Photo


    FX: Trade war seesaw

    Investors were relieved that China-US trade negotiations have not broken down but they are not expecting any breakthroughs either. Major US indices rallied more than 1% in overnight markets with futures pointing to a weaker open today. The mid-rate for USDCNY was barely changed at 7.0570 on Monday vs 7.0572 last Friday but spot USDCNY rose to 7.1512, 1.3% above its mid-rate and closer to the offshore USDCNH at 7.1666. The above price actions suggest more market volatility ahead amidst the fluid trade war.

    The first round of China-US trade talks held in Shanghai in late July ended in mutual criticisms followed by China being labelled a currency manipulator and new rounds of tit-for-tat tariffs. The same red lines are likely to hinder progress at the Washington talks in early September. China wants negotiations to be based on equality and mutual respect. US President Trump is not about to change his whiplash strategy with China and has insisted that any deal must be on US’s terms. China cannot agree to a deal unless the US withdraw tariffs which US negotiators want as a tool of enforcement. Keep those seatbelts on.

    Rates: Taking stock of rates after the recent volatility   
                            
    Sentiment pulled back from the brink as news emerged that China-US trade talks are still ongoing. Ostensibly, the market viewed this as a step down from the tariff trading that took place over the past few days. However, hopes for any kind of a deal are understandably still muted. The intraday swings over the past two trading days have been sizable (1.44% to 1.66%) as investors grapple with the twists in trade war narrative. In the absence of this escalation, we suspect that 10Y yields would be closer to 1.70%. Lingering trade war worries will keep haven demand ample but we are leaning towards the view the USTs (especially the longer-term ones) are expensive at current levels.
     


    Asia govvies have held up generally well through the recent bout of volatility. Even Indonesia (which has been traditionally vulnerable to swings in global sentiment) saw rates behave. By the close of the trading day, yields have barely budged from opening levels. We suspect that there may be a reluctance by investors to chase DM yields even lower and a growing recognition that Asia govvies offer pickup opportunities. Moreover, against a backdrop of slowing growth and muted inflation, the easing cycle will support frontend bonds. For longer-term bonds, Indonesia and Malaysia still screen well on our Asia Rates Valuation Indicator (ARVI).


    Philip Wee

    FX Strategist - G3 & Asia
    philipwee@dbs.com

    Eugene Leow

    Rates Strategist - G3 & Asia
    eugeneleow@dbs.com
     

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