Wagers on more dovish Fed talk keep yields

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NEW YORK/LONDON/SINGAPORE
European shares were spooked by Iran tensions and trade jitters on Tuesday, while the risk of more dovish talk from the Federal Reserve inflated gold to sixyear highs and stoked demand for safeharbour currencies like the yen and Swiss franc. President Donald Trump on Monday signed an executive order imposing sanctions on Supreme Leader Ayatollah Ali Khamenei and other top officials. The move is a further worry for investors waiting anxiously to see if anything comes of Sino-US trade talks later this week, with sentiment not helped after a senior US official said president Donald Trump would be happy with “any outcome” from the trade talks with China. The pan-European STOXX 600 index fell 0.3 percent, with the technology sector bucking the trend on the back of Capgemini’s purchase of engineering and digital services company Altran for 3.6 billion euros (Dh15.05 billion). Capgemini shares rose 7 percent and those in rival SAP SE 0.3 percent, pushing the sector around half a percent up. Altran surged 21 percent. Our view is that because of the very high global economic uncertainty markets have become very twitchy and can move a long way on not much news like Trump’s meeting with Xi at the G20,” said Gerry Fowler, global multi-asset strategist at Aberdeen Standard Investments. At the moment, the data looks OK but the sentiment has deteriorated and we expect that to continue in the second half of the year, he added. Trump is slated to meet one-on-one with at least eight world leaders at the G20 summit in Osaka, including China’s President Xi Jinping and Russian President Vladimir Putin. Chinese investors seemed none too hopeful as Shanghai blue chips slipped 1 percent. That led MSCI’s broadest index of Asia-Pacific shares outside Japan down 0.4 percent. Japan’s Nikkei lost 0.4 percent, while S&P 500 e-minis edged down 0.2 percent. FED SPEAKERS There are no fewer than five Fed policymakers speaking on Tuesday, including Chair Jerome Powell, and markets assume they will stick with the recent dovish message. It’s always possible the chair could walk back some of the market’s dovish interpretation of last week’s FOMC meeting… but we suspect he will reinforce the message laid out last week, said Kevin Cummins, a senior US economist at NatWest Markets. By the end of July, we believe the Fed will have seen enough to decide that action to counter downside economic risks and low inflation/inflation expectations is warranted, and so we look for a 25 basis point rate cut at the next FOMC meeting. Markets are running well ahead of that. Futures are fully priced for a quarter-point easing and imply around a 40 percent chance of a half-point move.A total of 100 basis points of cuts are implied by mid-2020, a major reason two-year yields are well under cash at 1.715 percent. GOLD SOARS Yields on 10-year Treasuries have dived 120 basis points since November and, at 1.99 percent, are almost back to where they were before Trump was elected in late 2016. German 10-year bond yields hit a new record low of 0.332 percent, down 2 basis points on the day. The dollar has fallen for four sessions in a row against a basket of other currencies to stand at a three-month low of 95.989. USD DXY now looks likely to break through the March low of 95.76 and below their 95.0, said Tapas Strickland, a markets strategist at NAB.

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