Market wrap: focus on the threat of US tariffs - Westpac

Analysts at Westpac explained that market talk Friday remained focused on the threat of US tariffs but US equities were able to recapture some lost ground. 

Key Quotes:

"The US administration’s pledge to place tariffs on steel and aluminium imports reverberated Friday with European equities falling steeply. Foreign leaders condemned the decision and threatened retaliation and there was clear division within the Republican Party. President Trump tweeted, “trade wars are good and easy to win” and Commerce Secretary Ross argued the case for tariffs in the media, but Treasury Secretary Mnuchin and top economic adviser Cohn were notably silent.

Germany’s centre-left SPD members voted around 66% in favour of a Merkel-led coalition with CDU/CSU. Although widely expected, it will allay concerns over outside risks to Germany and allow a functioning government to form five months after the general election. This helped EUR/USD extend Friday’s gains early Monday, to above 1.2340, up about 0.7% over 24 hours. Italian election results will be released during Monday’s Asian session, but no clear result is likely today.

USD/JPY fell as far as 105.25 – the lowest since Nov 2016 – as traders seized on comments from BoJ governor Kuroda in parliament. He said that the bank would consider how to reduce monetary stimulus some time in fiscal 2019, given that the inflation target should have been met. This is a serious caveat but his language was bold enough to draw attention.

AUD/USD was rangebound between 0.7735 and 0.7765 Friday, then ticked above 0.7770 early Monday as the euro dragged other pairs with it. NZD performed poorly, slipping from 0.7280 to 0.7220. AUD/NZD thus rose from 1.0665 in local trade Friday to 1.0730/40.

US 10yr treasury yields rose from 2.79% to 2.86% as stocks recovered, while 2yr yields rose from 2.19% to 2.24%. Fed fund futures continued to price three more hikes by end-2018 (with March highly likely), and another in 2019."