Sluggish Start As Wait For Trade News Goes On

WHERE WE STAND – Yesterday didn’t exactly mark the most exhilarating of starts to a trading week that we’ve ever seen.

The vast majority of the day was spent waiting, patiently or otherwise, as participants twiddled their thumbs, lacking conviction overall, pending news from the latest round of US-China trade talks, held here in London.

That waiting, though, was largely in vain, amid late-day reporting that the talks, described as “good” by Treasury Secretary Bessent, and “fruitful” by the obsequious Commerce Secretary Lutnick, will continue today as well.

I suppose this is a good sign, so I shan’t complain too much, even if reporting on what’s been discussed has been relatively light. That is, apart from WSJ sources noting that Treasury Secretary Bessent had been given permission to negotiate away restrictions on various tech sales to China. As noted yesterday, all the noises seem positive here, reinforcing my view that the direction of travel is now firmly towards deals being struck, and that peak uncertainty/chaos is firmly in the rear view mirror.

My assumption, from these talks, is that this probably ends with China smoothing the process around rare earth exports to the US, and the US selling some more tech back the other way, along with a commitment to more talks in the relatively near future.

While we all played that waiting game, however, the risk-on vibe that had prevailed as last week drew to a close persisted. Consequently, stocks notched solid gains on Wall Street, with spoos extending the rally further above the 6,000 mark, as the bulls remain firmly in control of proceedings, and with a break above that psychological level causing some belated FOMO-driven buyers to enter the fray as well. Now that we’ve broken above that level, fresh record highs stand as the next upside target.

Major event risk is somewhat lacking for the time being, which should help to permit equities to take the path of least resistance to the upside for now, while solid economic data and earnings growth also provide solid support to the bull case. While tomorrow’s CPI report is the next obvious catalyst, it shan’t be a gamechanger for the FOMC; their next meeting, on 18^th June, is set to be largely a placeholder meeting, and probably won’t be a huge market-mover either. As a result, providing that this week’s Treasury supply is ably digested, we’re probably starting to look towards the expiration of the ‘Liberation Day’ tariff pause in early-July, and the June jobs report, as the next big risks on the horizon.

Speaking of Treasuries, we saw dip buyers emerge across the complex yesterday, possibly as participants attempted to front-run the aforementioned auctions. The case for dip buying remains a strong one, with 4.5% on 10s and 5.0% on 30s remaining attractive levels to enter, and with the curve steepening taking a breath for the time being. However, with those auctions, and a hefty slate of corporate issuance, both now in the mix, those buyers might go into hibernation for the rest of the week.

As for markets elsewhere, it proved a very sluggish start to the week indeed. Most of G10 FX trod water, meandering along in relatively directionless fashion, while at the same time respecting recent ranges – the DXY hovering around 99, cable well shy of 1.35, the EUR not yet ready to take on 1.15 once more, etc.

It must be said that volumes were thinner than usual, owing to public holidays across most of Europe, though given the aforementioned lack of major catalysts on the horizon, maybe we should come to view this as a ‘new normal’. It will be for most countries on the Med, anyway, who probably won’t now be back until September!

Conditions in the commodity complex were similarly uninteresting, outside of the surges seen in both platinum and palladium which are rather outside my wheelhouse. Gold found some buyers as well, though, tagging along on the back of this move, while also attracting continued demand from those seeking a degree of protection amid elevated uncertainty. I still like the yellow metal higher, and imagine that we’ll probably print a new record once again before the year is out.

I don’t, though, have much love for crude right now, as WTI lingers around $65bbl. The demand outlook remains weak, and the ‘sell the rumour, buy the news’ trade on the back of OPEC+’s 411k bpd July output hike last week has probably run its course for the time being. Tactically, short crude appears attractive as the war for market share continues to take precedence over a desire to prop up prices.

LOOK AHEAD – Another rather light data docket up ahead today, with rather little by way of ‘meat on the bones’, until we get to the May US CPI figures tomorrow lunchtime.

We do, though, get the latest UK labour market figures this morning, even if the data, referencing the three months to April, does need to be taken with a huge pinch of salt, owing to ongoing survey issues at the ONS. Anyway, unemployment is set to have risen to 4.6%, a new high since the middle of 2021, while overall earnings are seen rising 5.5% YoY, skewed higher in part by the annual rise in the national living wage, and in part as a result of payback from an unexpectedly soft March print. None of this, though, is likely to materially alter the BoE policy outlook, with a June ‘skip’, followed by a 25bp cut in August, still the base case.

Elsewhere, a plethora of ECB speakers are set to make remarks, though all will likely reiterate President Lagarde’s message that the easing cycle is as good as over. We also have 3-year supply from the States later, though this should be digested easily, with tomorrow’s 10-, and Thursday’s 30-year sales much bigger tests.