US and China reach trade deal

The US and China have agreed to substantially lower the tariffs both sides have imposed on goods trade for 90 days. For the US, it will cut the tariff rate on Chinese imports to 30% from 145% while China will reduce its own tariff on US goods to 10% from 125%. The agreement follows direct talks between representatives of both countries that took place over May 10-11.

Both China and the US agreed to establish a consultation mechanism to allow further negotiation on trade issues and while not eliminating all tariffs, which appears to be China’s goal, it has helped to shift market sentiment on trade and the global economy to a much more positive footing.

Today’s Economic Data and Events

10:00 UK ILO unemployment rate Mar: forecast 4.5%

11:00 TU current account balance Mar: forecast -USD 4bn

13:00 GE ZEW survey expectations May: forecast 11.3

14:30 IN CPI y/y Apr: forecast 3.2%

16:30 US CPI m/m Apr: forecast 0.3%

16:30 US CPI y/y Apr: forecast 2.4%

Fixed Income

US Treasuries plunged in response to the news that the US and China had reached an agreement to cut tariffs. Yields on the 2yr UST rose by almost 12bps at the close to settle at 4.0103% while the 10yr yield rose 9bps to 4.4709%. Markets have slashed their expectations for the June FOMC meeting to less than 3bps of cuts, implying about an 12% probability of the Fed cutting rates.

Warba Bank of Kuwait mandated banks for a perpetual AT1 sukuk to raise USD 250m.

Sobha Realty priced a USD 500m 3yr sukuk at 8%.

The Central Bank of the UAE carried out its regular auction of Mbills at the start of the week. The bank sold AED 5.942bn of 28-day bills at a yield of 4.55%; AED 4bn of 70-day bills at 4.57%; AED 2.225bn of 98-day bills at 4.57% and AED 11.848bn of 266-day bills at 4.58%.

FX

The US dollar surged against peers overnight in response to the US – China trade arrangement. EURUSD slumped by 1.5% to close at 1.1087 while GBPUSD sold off by nearly 1% to 1.3176. USDJPY was the biggest performer among major pairs, rising by 2% to 148.46.

Commodity currencies also dragged lower with AUDUSD down 0.7% at 0.6372, NZDUSD lower by 0.9% at 0.5855 while USDCAD showed relatively limited moves, rising by 0.3% to 1.3975.

Equities

Equity markets rallied sharply overnight as risk appetite returned. The Dow Jones added 2.8% while the S&P 500 gained 3.3% and the NASDAQ rallied more than 4.3%. European markets were also stronger with a 1.6% gain in the Euro Stoxx while the FTSE 100 added about 0.6%.

Local markets received a lift with the DFM gaining 0.4% while the ADX added a bit less than 0.2%. The Tadawul had a strong rally of 1.3% overnight.

Commodities

Oil prices were higher overnight in response to the US – China trade deal though the moves were relatively contained. Brent added 1.6% to close at USD 64.96/b while WTI was up by 1.5% to USD 61.95/b.

More of the action was in metals markets where gold prices slumped 2.7% to USD 3,236.39/troy oz. Industrial metals were broadly stronger with aluminium, copper and iron ore all posting gains.