Yen and bond bulls charge on; Argentina braces for mauling
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LONDON (Reuters) – Persistent concerns about a prolonged U.S.-China trade war and a no-deal Brexit kept the yen and bond bulls charging on Monday, while Argentina’s markets were set to crash after voters gave its president an election mauling.
FILE PHOTO: A Japan Yen note is seen in this illustration photo taken June 1, 2017. REUTERS/Thomas White/Illustration
Early gains for Asia and Europe’s main bourses had long disappeared and Wall Street futures were 0.6-0.8% in the red as traders limbered up in New York for another potentially volatile week..
Chinese stocks saw a rally of more than 1% after the yuan avoided further drama and financial regulators relaxed margin financing rules there late on Friday, but safety remained the name of the game.
Gold resumed its rise while FX safe harbor, the Japanese yen, shot to its highest in nearly a year and a half at 105.15 yen against the dollar having also gained smartly against the euro and Brexit-bruised British pound.
“Risk indicators and global markets have become more shaky and the yen is reflecting those concerns, and safe-haven shelters like the yen and the Swiss franc should continue to benefit,” said Commerzbank currency strategist Esther Reichelt.
In bond markets, the demand for guaranteed income was also unrelenting.
U.S. Treasuries and German bunds stayed strong while Italy’s debt gave the rally an extra boost after Fitch kept the country’s rating unchanged despite the increased possibility of snap elections being called there.
Calls for a snap poll by the leader of the far-right League, Matteo Salvini, ran into mounting resistance from other parties whose support would be needed for the plan to succeed.
“Fitch kept Italy’s rating unchanged and some market participants may be betting that a snap election could be delayed,” said DZ Bank rates strategist Sebastian Fellechner, referring to the fall in yields.
With economists waiting for a batch of global data this week, Goldman Sachs became the latest heavyweight to cut its U.S. growth forecast at the weekend and give a warning that a U.S.-China trade deal before the 2020 U.S. presidential election now looked unlikely.
One week ago, China allowed the yuan to break through the key 7-per-dollar level for the first time since 2008, prompting Washington to label Beijing a currency manipulator and sparking market ructions.
The International Monetary Fund said on Friday that it stood by its assessment that the value of China’s yuan was largely in line with economic fundamentals.
TROUBLE IN ARGENTINA
Argentina’s financial markets were bracing for impact after voters there soundly rejected President Mauricio Macri’s austere economic policies in primary elections, casting serious doubt on his chances of re-election in October.
With 99% of the ballots counted, a coalition backing opposition moderate Peronist candidate Alberto Fernandez – whose running mate is former president Cristina Fernandez de Kirchner – had won by a far wider-than-expected 15.5 percentage points with 47.65% of votes.
Argentina’s euro-denominated 2028 bond had slumped more than 11 cents in Europe and brokers were sounding the alarm about both a sharp plunge in the peso and in the country’s equity markets in Buenos Aires.
“We expect a significant sell-off in EXD (hard currency) assets and heavy pressure in ARS (Argentine peso) with a potential devaluation in coming weeks,” Bank of America Merrill Lynch analysts said in a note.
“Investors are likely to re-price bonds to show a high likelihood of policy transition and a significant likelihood of a debt restructuring,” they added.
Traders also had pre-market calls pointing to 20% plunges for bank shares such as Banco Supervielle and Grupo Financiero Galicia
The peso has already shed over 8% in the past month, and analysts widely expect the central bank to try and stop a further major downward move down, but HSBC’s senior Latam economist, Jorge Morgenstern, cautioned it might be insufficient.
“We could see an important sell-off in ARS today, and we adopt a cautious short-term view”.
Wall Street has been in the doldrums since President Donald Trump said on Friday the United States would not make a trade deal with China for now, though he also said talks would continue.
White House trade adviser Peter Navarro subsequently said that the United States was still planning to hold another round of trade talks with Chinese negotiators.
In commodities, oil prices also reflected the concerns about global growth and trade, having risen sharply on Friday on a drop in European inventories and production cuts by the Organization of the Petroleum Exporting Countries.
International benchmark Brent crude futures were at $58.16 a barrel, down 37 cents from their previous settlement.
U.S. West Texas Intermediate (WTI) futures were at $53.89 per barrel, down 61 cents from their last close.
Both benchmarks fell last week, with Brent losing more than 5% and WTI falling about 2%.
“The market is facing a buyers’ strike,” said Michael Tran, commodity strategist at RBC Capital Markets, noting the low level of investors’ long positions betting on higher prices.
“Despite the laundry list of disruptions and additional barrels at risk, investor length is currently near a multi-year low.”
(Graphic: Rising gold prices link: tmsnrt.rs/2YD8nsu).
Additional reporting by Saikat Chatterjee in London and Bozorgmehr Sharafedin, editing by Ed Osmond and Gareth Jones