FxWirePro: Glimpse at the US Treasury and bullion market updates and trades amid US-China trade tensions

“They broke the deal”, and “they will be paying”, President Trump said at a campaign rally during Asian morning hours, which has dampened risk sentiment on markets. While he also added that things will “work out”, it nevertheless looks inevitable that the US will impose new tariffs on USD200bn worth of Chinese goods tomorrow. China’s Commerce Ministry published a statement yesterday evening announcing that China would retaliate “to some degree”. It thus looks very likely that the trade war is entering round 2. This does not bode well for the trade talks which are supposed to be held in the next two days. The Chinese delegation, led by Vice Premier Liu He, will arrive in Washington today. If the new tariffs are indeed introduced, they will take effect tonight, just in the middle of talks. 

The crude oil market has sensed under renewed pressure this morning on the above-stated geopolitical issue (U.S./ China trade agreement).

Fed Chair Powell’s remarks pushing back against the notion of an “insurance cut” at last Wednesday’s post-FOMC press conference set about some turbulent repricing into the end of the week. Treasuries began selling off quite sharply immediately following Powell's pushback as gold dove lower, testing $1,270/oz on Thursday.

However, Friday’s April US jobs report, in particular, the unchanged average hourly earnings figure at 3.2%, added a further wrinkle and prompted an unwind in some of Wednesday's and Thursday's repricing as it raised questions if the current inflation undershoot is actually as transitory as the Fed Chair inferred.

Nonetheless, 10-year nominal yields still ended the week 3bp higher with 10 year real yields increasing 9bp and gold ending the week down 0.6%.

Moreover, by the end of last week, US rates markets were pricing in only around a 60% probability of ease by the end of 2019, compared to a full 25bp ease at the end of the week prior. Contrary to most of the first four months of this year, valuations largely do not tell a compelling story either. After the recent rise in yields, 10 year Treasuries no longer appear rich relative to our rates strategists’ fair value model.

Moreover, after fully closing the mispricing gap last week, gold still appears relatively fairly priced vs US real yields. Looking ahead, given the lack of any mispricing, our rates strategists call for largely range-bound treasury yields which should also keep gold prices constrained in the near future. For yields to move materially higher, we would likely need to see higher inflation expectations or less dovish policy expectations in other DM countries. To this end, we will get the next major update on inflation this Friday (May 10) with the release of April’s US CPI data. 

Gold vols: Front-month gold gamma rose from 7.8 vols to 8.3 vols to start off last week and gradually declined throughout the rest of the week. The current level of 7.75 is close to being the lowest vol level on record.

Meanwhile, we refer to JP Morgan’s SVM model (Machine Learning Approach to Trading Gold Volatility) that has been stuck at neutral for the past few weeks.

However, the relative value ETF volatility model recommends trading GLD vs GDX. In particular, buying GLD 3M ATM straddles at 8.50% and selling GDX 3M ATM straddles at 22.40% vega neutral and delta-hedged on both legs are recommended.

The relative value model is currently showing GLD as having the fourth cheapest volatility, whereas GDX is ranked fair to rich in our universe of 76 optionable ETFs. Courtesy: JPM & Commerzbank

Currency Strength Index: FxWirePro's hourly EUR spot index is inching towards 49 levels (which is bullish), while hourly USD spot index was at 1 (absolutely neutral) while articulating (at 07:49 GMT). 

For more details on the index, please refer below weblink: http://www.fxwirepro.com/currencyindex