Trade Tensions Rise

June 3, 2019 Chatham Financial

Prior Week Summary

Intensifying trade concerns gripped markets last week capping an end to the worst month of the year for U.S. equity markets and sparking a global bond rally. Trade tensions continued to escalate between the U.S. and China with President Trump saying that the U.S. is not ready to make a deal and that existing tariffs on Chinese goods “could go up very very substantially, very easily.” Market participants saw some de-escalation on Sunday, however, when Vice Commerce Secretary Wang Shouwen said, “We’re willing to adopt a cooperative approach to find a solution.” Elsewhere on the trade front, the Trump administration indicated that they would levy 5% tariffs on all Mexican goods beginning on June 10th, citing a perceived unwillingness by Mexico to help the U.S. stem the flow of illegal immigration at the southern border. U.S. and Mexican officials are expected to begin negotiations on Monday in Washington.

Amid global growth fears, exacerbated by the Trump administration’s recent escalation of trade tensions with Mexico and China, Fed Funds future contracts are now suggesting that the Federal Reserve will cut interest rates twice in 2019. Speaking to the Economics Club of New York on Thursday, Vice Chairman of the Federal Reserve, Richard Clarida, suggested an openness to a rate cut saying, “If we saw a downside risk to the outlook, then that would be a factor that could call for a more accommodative policy.”

The Look Forward

Market participants will be looking forward to the release of the May jobs report on Friday, as well as updated figures on construction spending, factory orders and the trade balance, among others.

Rates Snapshot

Sources: Bloomberg Finance L.P., (Treasuries) Chatham Financial (Swap Curves), FHLB Boston, Chicago, Dallas, Des Moines for FHLB Advance Rates. Wells Fargo Brokered CD Indications.

 

Market Implied Policy Path (Overnight Indexed Swap Rates)

Source: Chatham Financial

 

Fixed Income Snapshot

Source: Bloomberg Finance L.P.

 


Disclosures

Chatham Hedging Advisors, LLC (CHA) is a subsidiary of Chatham Financial Corp. and provides hedge advisory, accounting and execution services related to swap transactions in the United States. CHA is registered with the Commodity Futures Trading Commission (CFTC) as a commodity trading advisor and is a member of the National Futures Association (NFA); however, neither the CFTC nor the NFA have passed upon the merits of participating in any advisory services offered by CHA. For further information, please visit https://www.chathamfinancial.com/legal-notices/.

Transactions in over-the-counter derivatives (or “swaps”) have significant risks, including, but not limited to, substantial risk of loss. You should consult your own business, legal, tax and accounting advisers with respect to proposed swap transaction and you should refrain from entering into any swap transaction unless you have fully understood the terms and risks of the transaction, including the extent of your potential risk of loss. This material has been prepared by a sales or trading employee or agent of Chatham Hedging Advisors and could be deemed a solicitation for entering into a derivatives transaction. This material is not a research report prepared by Chatham Hedging Advisors. If you are not an experienced user of the derivatives markets, capable of making independent trading decisions, then you should not rely solely on this communication in making trading decisions. All rights reserved. 19-0141

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