Risk aversion continues into the new month

China blames Trump

The sharp deterioration in trade relations into the close of last week confirmed that US indices had a bad month, with the US30 and the SPX500 indices both down the most in five months, while the NAS100 index capitulated the most in seven.

NAS100 Daily Chart

Source: OANDA fxTrade

The losing theme continued into the Asian morning session with US indices dropping between 0.53% and 0.75%. Weekend developments saw China releasing a research paper which highlighted that the escalating trade war had done serious damage to the US economy by increasing production costs, forcing price hikes, hurting growth while creating hurdles for US exports to China. It laid the blame for the deterioration in negotiations squarely on US President Trump, but offered the olive branch that it was still willing to sit down at the negotiating table and end the trade war, but would not be beaten down into giving concessions.

Talk of rate cuts hurting the dollar?

The flight to safe havens has boosted both gold and US Treasuries, with the 10-year US yield falling to a 2-year low of 2.12%. On the one hand the buying of US bonds is a boost for the US dollar, but recently US interest rate markets have begun pricing in the possibility of a Fed rate cut by the end of the year. The probability of a 25 bps rate cut as early as next month has jumped to 54% today while the chances of a cut by the end of the year are as high as 95%.

This has started to take some of the shine off the US dollar, with the Dollar Index, the measure of the US dollar’s value against six major currencies, falling for a second straight day. The USD/SGD rate, a close proxy for the US dollar, is down for a third consecutive day at 1.3704, down almost 1% from the peak on May 29.

USD/SGD Daily Chart

Source: OANDA fxTrade

It’s all about PMIs today

The final readings for the Markit May manufacturing PMIs for Germany, the UK, the Euro-zone and the US are due today, with no changes from the flash estimate expected for Germany and the Euro-zone (44.3 and 47.7, respectively) and a downgrade to 52.4 from 53.1 for the UK seen, according to the latest survey of economists.

The US flash reading is also seen unchanged at 50.6, while the ISM manufacturing PMI reading is expected to rise to 53.3 from 52.8 combined with a big jump to 55.1 from 50.0 in the prices paid index. That would be the highest level in six months and could be linked to the increased tariffs on imports.

The full MarketPulse data calendar can be viewed at https://www.marketpulse.com/economic-events/

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