FxWirePro: Quick Glance at Impact of Trade War Risks on USTs and Rates Derivatives

The prevailing trade war is turning to a war of words between the US and China. President Trump in Tokyo yesterday said China probably wished they had made the deal on the table before they tried to renegotiate it and that the US is not ready for a deal. He also threatened that tariffs on Chinese goods could go up very substantially and very easily. China’s Foreign Ministry pushed back on the accusations. The spokesman accused the US of inconsistency, flip-flopping between saying an agreement could be imminent and then remarking an agreement is difficult. He said China, on the other hand, has been consistent on its stance that differences between the countries should be resolved through “friendly consultations and negotiations”. This is nothing really new for the markets. Expectations were already low on any form of a deal ahead of the expected meeting between the two presidents at the G20 meeting in Osaka on 28-29 June. 

As per JP Morgan’s projections, Persistent’s trade tensions could introduce downside risks, however, this is unlikely to be impactful over the near-term. 

Thus with valuations rich, position technicals long, and supply technicals bearish, we turn tactically short 10-year Treasuries. 

The analysis was reassessed on economic data surprises, and discuss April stripping activity and the debt ceiling. Stay in 5-year breakeven wideners. 

The repricing in vol has left opportunities in skews; buy outstrikes of 3Mx30Y 1x2 receiver spreads and buy outstrikes of 20bp OTM 3Mx2Y 1x2 payer spreads. The switch to SOFR discounting is a steepener for the FF/SOFR basis curve, convexity effects impose positive directionality with rates. Courtesy: JPM

Currency Strength Index: FxWirePro's hourly USD spot index is flashing at -1 level (which is neutral) while articulating at (13:51 GMT). 

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