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Risk Aversion Increases on G7 Uncertainty

Given the quiet economic calendar today, the continuing trade spat between the US its closest allies will attract a good deal of attention as the G7 summit begins. The broader US market posted its first loss in 5 days as the recent equity rally, and more specifically tech rally, faltered, whilst investors started to show unease over the potential climate at the G7 Summit. Souring investor sentiment resulted in a softer session for Asia and indicates a weaker start for Europe on the open

 

There is little doubt that trade will top the agenda at the Friday and Saturday Summit in Canada. Given Trump’s trade levies on US allies and his general unpredictability, uncertainty could continue to form a central pillar to trading as we move through the summit and into the weekend. Trump has already had a twitter spat with France’s President Macron prior to the event, which doesn’t bode well. However, the big question for traders is unlikely to focus on Trump’s actions, but rather the level of hostility and aggression that the other leaders will show?

 

Up to now, the markets were sanguine regarding increasing global trade tensions, as traders assumed Trump’s aggressive stance is just another wild negotiating tactic. It’s already clear that no one wants to play ball with Trump, with those involved already promising tit for tat retaliation. However, the problem we envisage here is that the collective group of leaders could use this as an opportunity to make their point clearer, turning the event into a reason to take risk off the table. Uncertainty as to how these talks will pan out is unnerving investors sending them out of riskier assets such as stocks, and into traditional safe havens such as treasuries and the yen.

 

Bonds Drive FX market

Risk aversion ahead of today’s G7 Summit, in addition to broader concerns in Europe over the unwinding of the ECB stimulus programme has seen an uplift inflows into US treasuries, which pulled treasury yields sharply lower. Bond market moves are driving FX trading dragging the dollar to 3-week lows. Meanwhile, the euro extended its gains on optimism that the ECB would be unwinding the QE programme before the end of the year. This makes a July ’19 rake hike a real possibility. Continued uncertainty and risk aversion could see the dollar fall lower on bond market moves, potentially lifting the euro higher.

 

Risk Events Across the New Week

There are several significant risk events lined up, which are making traders uneasy. First up, the G7 Summit, which will be followed by political and policy events next week, such as the FOMC, ECB meeting and the US – North Korea Summit. Giving the potential impact on the markets that each of these events individually could cause, that having them lined up one after the other will make for a volatile week, particularly for the dollar.

 

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