Focus shifts back to yields

Summary

Optimistic sentiment makes it into another global session intact, though accelerating Treasury yields are a renewed concern.

“Groundless” boost

Relative stability in risk-seeking markets is at least partly due to a pause in news flow on trade after an action-packed start to the week. Investors have been mostly just left with the Premier of State Council’s reiteration of the same pledge offered by top financial and monetary officials for months. Talk of deliberate yuan depreciation was “groundless” Li Keqiang said. To all intents and purposes, it’s another incremental boost for risk-taking that underpinned Shanghai and Shenzhen equity indices again, and again exported the buying rationale over to European stocks and Wall Street futures.

No thaw

An obvious flaw in that rationale is that the latest deterioration in relations has merely delayed worst outcomes rather than avoided them. There is no thaw—China has yet to accept the Treasury Secretary’s invitation to ice-breaker talks. Further escalation looks all but inevitable, and, any ‘dividend’ from lower-than-initially mooted tariff rates on the U.S. side may evaporate once mid-term elections pass and tariff rates are then possibly hiked, as political risk to the White House eases. Furthermore, whilst the best guess on China’s yuan intentions is the ‘black box’ model, the renminbi’s pattern of downward drift (5.3% lower this year) and the PBOC’s well-defined defence levels leave policy questions open. We continue to expect U.S.-China trade relations to worsen before they improve and that the lull in global markets’ sensitivity will prove temporary.

Miners buoyed

FTSE miners are again the biggest beneficiaries of steady calm with all blue-chip names higher. The belated entrance of HSBC among the week’s risers after Tuesday’s notable slip keeps the benchmark index above the flat line even after the gauge suffered a sharp setback from stronger than expected inflation data. The biggest sign yet that the death of the pound/FTSE correlation is exaggerated saw turbo-charged cable trim recently resilient consumer cyclical shares, already dented by Kingfisher’s latest profitability wobble. Inflation news worked the other way for banks. The kneejerk reaction to revived CPI volatility is to link it with rate expectations, despite ambivalent implications for growth and other consumer-led activity, that could eventually crimp the prospects of RBS, Barclays and Lloyds, which are firm on Wednesday. For now, bank shares are among sectors participating with gains in Continental markets, though STOXX’s mining-related basic resource index is again at the front, auto and parts shares are not far below. Further delay before Beijing responds to Washington’s invitation could be the point on which global investor consensus could begin to show cracks, even as the White House weighs an ex-ante pledge to counter-retaliate.

Dollar and 10-year yield reunited

Another key candidate for a broader inflection point could be renewed yield turbulence. U.S. stock index futures pare gains a couple of hours to the cash open as the 10-year Treasury yield notably holds above the angst point of 3% after touching 3.07% for the first time since May. For many, the only surprise is how long it took to get back here. A potential recoupling with the dollar, consolidation of which is being shortened as USD/JPY soars on risk appetite, should be the biggest worry for emerging market foreign exchange buyers. In Italy, continued pressure on Economy Minister Tria for a budget that adheres to Brussels prescription is beginning to lift BTP yields (and Spanish and Greek) enough for spread widening to resume. The euro is duly in retreat from Wednesday highs and more so from its latest failed attempt to crack $1.173. Prime Minister Theresa May’s reported rejection of the latest formula proposed by chief EU negotiator Barnier puts sterling under sharper pressure at last look. This is all grist for the next turn of the dollar’s grind.

This report is intended for general circulation only. It should not be construed as a recommendation, or an offer (or solicitation of an offer) to buy or sell any financial products. The information provided does not take into account your specific investment objectives, financial situation or particular needs. Before you act on any recommendation that may be contained in this report, independent advice ought to be sought from a financial adviser regarding the suitability of the investment product, taking into account your specific investment objectives, financial situation or particular needs.

StoneX Financial Pte. Ltd., may distribute reports produced by its respective foreign entities or affiliates within the StoneX group of companies or third parties pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed to a person in Singapore who is not an accredited investor, expert investor or an institutional investor (as defined in the Securities Futures Act), StoneX Financial Pte. Ltd. accepts legal responsibility to such persons for the contents of the report only to the extent required by law. Singapore recipients should contact StoneX Financial Pte. Ltd. at 6826 9988 for matters arising from, or in connection with the report.

In the case of all other recipients of this report, to the extent permitted by applicable laws and regulations neither StoneX Financial Pte. Ltd. nor its associated companies will be responsible or liable for any loss or damage incurred arising out of, or in connection with, any use of the information contained in this report and all such liability is hereby expressly disclaimed. No representation or warranty is made, express or implied, that the content of this report is complete or accurate.

StoneX Financial Pte. Ltd. is not under any obligation to update this report.

Trading CFDs and FX on margin carries a high level of risk that may not be suitable for some investors. Consider your investment objectives, level of experience, financial resources, risk appetite and other relevant circumstances carefully. The possibility exists that you could lose some or all of your investments, including your initial deposits. If in doubt, please seek independent expert advice. Visit www.cityindex.com/en-sg/terms-and-policies for the complete Risk Disclosure Statement.

ALL TRADING INVOLVES RISKS. LOSSES CAN EXCEED DEPOSITS.

City Index is a trading name of StoneX Financial Pte. Ltd. (“SFP”) for the offering of dealing services in Contracts for Differences (“CFD”). SFP holds a Capital Markets Services Licence issued by the Monetary Authority of Singapore for Dealing in Exchange-Traded Derivatives Contracts, Over-the-Counter Derivatives Contracts, and Spot Foreign Exchange Contracts for the Purposes of Leveraged Foreign Exchange Trading. SFP is also both Derivatives Trading and Clearing member of the Singapore Exchange (“SGX”). SFP is a wholly-owned subsidiary of StoneX Group Inc.

The information provided herein is intended for general circulation. It does not take into account the specific investment objectives, financial situation or particular needs of any particular person. You should take into account your specific investment objectives, financial situation or particular needs before making a commitment to invest, including seeking advice from an independent financial adviser regarding the suitability of the investment, under a separate engagement, as you deem fit. No representation or warranty is given as to the accuracy or completeness of this information. Consequently, any person acting on it does so entirely at their own risk.

The information does not represent an offer of, or solicitation for, a transaction in any investment product. Any views and opinions expressed may be changed without an update. To understand the risks and costs involved, please visit the section captioned “Important Information” and the “Risk Disclosure Statement”.

The information herein is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation.

StoneX Financial Pte. Ltd. 1 Raffles Place, #18-61, One Raffles Place Tower 2, Singapore 048616. Tel: 6309 1000. Co. Reg. No.: 201130598R.

This advertisement has not been reviewed by the Monetary Authority of Singapore.