Trade War May Spur China to Sell Treasuries as Yuan Tumbles

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Trade War May Spur China to Sell Treasuries as Yuan Tumbles

Benchmark 10-year notes last rose 15/32 in price to yield 2.4015%, from 2.455% late on Friday. In fact, fearful of the breakdown of trade talks with the U.S.by China, investors are fleeing equities and buying none other than USA treasuries, which is driving down interest rates.

This was the lowest neutral reading since March 4 and below 59 per cent the week before. "And you're also seeing President Trump confirmed a meeting with President Xi during next month's G-20 summit, which provides some optimism that despite the increase in tariffs, negotiations are still ongoing".

"Whenever tensions emerge between the US and China, questions arise as to whether China would sell off its Treasuries in retaliation", said Mark Sobel, a former Treasury official and now USA chairman for the Official Monetary and Financial Institutions Forum.

Trade rattled financial markets again, with stocks sinking for the fifth time in six sessions since China's defiance of Trump's warning not to retaliate for his imposition of higher tariffs Friday escalated the skirmish, driving demand for havens from gold to the yen while punishing risk assets. The president sprinkled his criticisms of China over the last 48 hours with enough signals that negotiations have not completely broken down that traders rushed back into the beaten down market to find bargains. West Texas crude rose above US$61 (S$84.5) a barrel. China's finance ministry said early on Monday it plans to set import tariffs ranging from 5% to 25% on 5,140 USA products on a target list worth about $60 billion.

Elsewhere, oil advanced as Saudi Arabia reported drone attacks on pumping stations, throwing the supply outlook into doubt. Bitcoin strengthened past $8,000, extending its longest winning streak since 2013.

Earnings this week include Alibaba, Tencent, Cisco, Nvidia. "The USD/JPY is trading higher, which means investors are selling the so-called 'safe-haven" Japanese Yen and USA stock index futures contracts are trading higher, signaling the return of buyers. Kansas City Fed President Esther George and Richmond Fed President Thomas Barkin also make appearances. Old school thinking says gold rallies during times of geopolitical turmoil, but new school thinking says that gold prices are controlled by interest rates.

Even without China, U.S. paper is still very much in demand.

Australian unemployment is out on Thursday.

Japan's Topix index dropped 0.7 per cent as of 9.05am in Tokyo. Currencies The yen was at 109.63 per dollar after falling 0.3%.

The MSCI Emerging Market Index decreased 1.7%.

London stocks gained 0.9 percent in late morning deals. while Frankfurt won 0.5 percent and Paris rallied 1.1 percent in early afternoon trade.

Britain's 10-year yield declined three basis points to 1.10%.

That being said, spot USDCNH is estimated to gyrate between 6.8548 and 6.9566 with a 68 percent statistical probability over the next 5 trading days judging by USDCNH 1-week implied volatility of 6.30 percent.

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