A Shaky Start To The New Trading Week

WHERE WE STAND – A shaky start to the new trading week, and the month of June, yesterday, in what appeared a weirdly delayed reaction to the tariff developments seen late last week, before markets eventually found their feet as the day went on.

To recap, Friday brought – President Trump ranting away about China having “violated” its trade agreement with the US; WSJ sources noting that this was due to the latter dragging its feet on rare earth exports; further reporting around potential greater US sanctions on Chinese tech firms; and, finally, Trump doubling tariffs on steel imports to 50%, effective tomorrow.

Of course, time will tell what the ‘endgame’ is amid all of this, though on the China issue at least it seems like a leader-level call could well be needed in order to break the deadlock. Some in the Trump Admin have noted that such a call may come this week, though I certainly shan’t be holding my breath on that front. Still, given recent performance, all this punchy rhetoric is probably going to end up as another example of the ‘TACO’ vibe with which we’ve all become so familiar. Or, perhaps more diplomatically, an ‘escalate to de-escalate’ strategy.

Anyway, what was interesting about the price action yesterday was that, as I alluded to last week, we remain in a dynamic of ‘buy America’ or ‘sell America’, as opposed to one of ‘risk on’ or ‘risk off’. This, though, does make a lot of sense. Every tariff threat takes another chunk out of the US’ institutional credibility, and provides international investors with further reason to trim US exposures. In contrast, the inevitable unwinding of those threats provides a crumb of comfort and certainty, which sees those US exposures increased once more. It seems, frustratingly, that we’ll just yo-yo between those two dynamics for the foreseeable future.

That said, I’m reluctant to read too much into yesterday’s action, given the choppy conditions seen, and the overall lack of conviction ahead of this week’s chunky slate of event risk, highlighted by the May US jobs report on Friday.

Our first dose of event risk came yesterday in the form of the May ISM manufacturing survey, a rather sub-par print at 48.5, not only below consensus expectations, but also down 0.2pts from the April figure. The details of the report were also pretty dismal, with prices paid largely unchanged at 69.4, while both the new orders & employment gauges remained sub-50. The catalyst for all this is obvious, but summed up best by one of the survey respondents – “Government spending cuts or delays, as well as tariffs, are raising hell with businesses”. Caution is needed, though, and we shouldn’t over-extrapolate from the report, given the huge disconnect seen recently between ‘soft’ and ‘hard’ data.

Markets, however, love to over-extrapolate absolutely every single fresh headline, with the soft ISM data compounding the earlier ‘sell America’ trade across the board.

That said, while stocks did suffer a bout of selling in reaction to the data, the market found a steadier footing later in the day, as dip buyers emerged once more, allowing both the S&P and Nasdaq to close in the green. I remain one of those dip buyers here, with the path of least resistance for equities leading to the upside, with peak trade uncertainty behind us, while both earnings and economic data remain – on the whole – solid.

Although stocks found a steadier footing, the ‘sell US’ trade persisted elsewhere.

Treasuries ended the day softer across the board, with benchmark 30-year yields tagging 5.00% yet again, though this, and 4.50% in the 10-year, have proved enticing levels to dip buyers in recent weeks, and I’d imagine that the same should ring true this time around as well.

The dollar was also softer against most peers, with the NZD leading despite relatively soft risk appetite. From a broader standpoint, however, the DXY remains in the broad 98 – 102 range that we’ve seen for some time, with the same ringing true elsewhere – the EUR stuck south of 1.15, cable capped by 1.36, and USDJPY continuing to find support at 142.50. I struggle to see these ranges breaking soon, at least not before NFP on Friday.

LOOK AHEAD – Focus will fall initially on the eurozone today, with the ‘flash’ May inflation figures out this morning.

Headline CPI is set to have fallen back to 2.0% YoY last month, in line with the ECB’s target for the first time since last October, while core CPI is seen sliding to 2.4% YoY, down from a prior 2.7%. Money markets already fully discount a 25bp ECB cut on Thursday, and the inflation data shouldn’t move the needle much on that front, but pricing just one further cut before year-end seems overly hawkish to me, especially given the likelihood of a sustained undershoot of the inflation goal next year.

Stateside, April’s JOLTS job openings and factory orders figures are both due. The former should continue to hover around the 7.1mln mark, while the latter will likely be skewed lower by a drop in aircraft and transport orders.

Finally, plenty of central bank speakers are again on the data docket. Four BoE policymakers, including Governor Bailey will testify to the Commons Treasury Select Committee this morning, while BoJ Governor Ueda is also set to speak.