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Bonds 'on fire' as flight to safety gathers momentum

Stock MarketsJun 03, 2019 07:19AM ET
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© Reuters. People walk past the London Stock Exchange Group offices in the City of London, Britain

By Marc Jones

LONDON (Reuters) - A stampede to safety sent benchmark government bond yields tumbling on Monday, hoisted the Swiss franc to its highest in nearly two years, gold to a 10-week peak and left oil heading for bear market territory.

After a torrid May that wiped $3 trillion off global equities, the worsening trade tensions and broader economic backdrop made for a jarring start to June.

European shares and Wall Street futures both fell further after Beijing sent another shot across Washington's bows on trade and then euro zone data came in weak, though the main groundswell was in bonds.

German government bond yields -- which move inversely to price -- fell to a new all-time low and those on two-year U.S. Treasuries were trying for their biggest two-day fall since October 2008, when the global financial crisis was kicking off.

"Bonds are more or less on fire and I think we are going to spend the week with trade dominating everything else," said Societe Generale (PA:SOGN) global strategist Kit Juckes.

With German and UK political concerns and worries about Italy's finances resurfacing too, "it is hard to think the yen is not going to be at least one of the winners this week," he said.

The Japanese currency consolidated Friday's biggest one-day jump in over two years at 108.40 yen per dollar, though Europe's go-to safety play, the Swiss franc, kept the rally going by scoring a near 2-year high against the euro.

The euro, for its part, hovered at $1.1176 having been stuck in one of its tightest ranges ever against the dollar for weeks and waiting to see how generous the European Central Bank will be with a new tranche of cheap funding this week.

Asian stocks had fared slightly better overnight as gains in South Korea and India offset a 4-1/2 month low for Tokyo's Nikkei. Chinese shares ended little changed though the yuan faced pressure.

A private survey of China's manufacturing sector published on Monday suggested a modest expansion in activity as export orders bounced from a contraction.

Economists noted increases in new export orders pointed to possible front-loading of U.S.-bound shipments to avoid potential tariff hikes that U.S. President Donald Trump - who kicked off a potentially confrontational state visit to Britain on Monday - had threatened to slap on another $300 billion of Chinese goods.

"Many firms are leaving China for other countries, including the U.S. in order to avoid paying the tariffs," Trump said on Twitter shortly after landing in Britain. "No visible increase in costs or inflation, but U.S. is taking billions."

RISING TENSIONS, FALLING ACTIVITY

With the bitter trade mood weighing, factory activity contracted in most Asian countries and the euro zone last month, surveys showed.

The euro zone's slowdown was for the fourth month running, and at an accelerating pace, as slumping automotive demand, Brexit and wider political uncertainty took their toll.

"The sector remains in its toughest spell since 2013," said Chris Williamson, chief business economist at IHS Markit.

A senior Chinese official and trade negotiator had said on Sunday the United States could not use pressure to force a trade deal, refusing to be drawn on whether the leaders of the two countries would meet at the G20 summit at the weekend.

The standoff between the world's two largest economies goes beyond trade, with tension running high ahead of the 30th anniversary of a bloody Chinese military crackdown on protesters around Beijing's Tiananmen Square (NYSE:SQ).

China's Defence Minister Wei Fenghe warned the United States not to meddle in security disputes over Taiwan and the South China Sea, after acting U.S. Defence Secretary Patrick Shanahan said Washington would no longer "tiptoe" around Chinese behavior in Asia.

"No one now thinks a deal would be possible at the G20. It is going to be a prolonged battle. Investors are rushing to the safe assets," said Norihiro Fujito, chief investment strategist at Mitsubishi UFJ Morgan Stanley (NYSE:MS) Securities.

BEWARE OF THE BEARS

The gloomy economic outlook has prompted traders to increase bets that the U.S. Federal Reserve will cut interest rates sooner rather than later.

Fed funds rate futures are almost fully pricing in two rate cuts this year, one by September, with more than a 50 percent chance of a move by July 30-31.

The 10-year U.S. Treasuries yield fell to as low as 2.07%, a level last seen in September 2017 while bond market volatility gauges have now spiked to the highest in more than two years.

It was lively in commodity markets too.

Brent oil futures tumbled almost 2% to $60.55 per barrel before pulling all the way back up to $62.55. They have dropped almost 20% since April, a plunge classed as a 'bear market' in trader parlance.

Another bashing for industrial metals sent Shanghai Copper to a 2-year low as safe-haven gold jumped to a 10-week high of $1,316 per ounce.

Mexico's peso steadied, meanwhile, after being whacked 2.5% late last week by Trump's sudden threat to impose tariffs -- 5% to begin but potentially going up to 25%.

Mexico's president Andres Manuel Lopez Obrador hinted on Saturday his country could tighten migration controls to defuse tensions with Trump, saying he expected "good results" from talks planned in Washington this week.

Bonds 'on fire' as flight to safety gathers momentum
 

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Comments (8)
ro to
ro to Jun 03, 2019 2:51AM ET
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Call President Obama back to office 2020 he will safe the world
ro to
ro to Jun 03, 2019 2:49AM ET
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He who do not pay tax... does not love his Own country
Paul Manefee
Paul Manefee Jun 02, 2019 11:46PM ET
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We should have FBI check out the China trolls on this board, to see based on what visa or status they originally came out of China
LI SH
LI SH Jun 02, 2019 11:46PM ET
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Right on....
HJ Index
HJ Index Jun 02, 2019 11:46PM ET
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then what? mark them with a star and put them into concentration camps?
Sean Livingstone
Sean Livingstone Jun 02, 2019 11:46PM ET
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The fbi and CIA had already tapped into Angela Merkel phone. What else they can't do?
Jmesrine wtf
Jmesrine Jun 02, 2019 11:46PM ET
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Sean Livingstone it was the NSA !
Devin Larzo
Devin Larzo Jun 02, 2019 11:46PM ET
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People are saying silly things on the internet! I'm sure they haven't heard that one yet.
bomz bomzov
bomz bomzov Jun 02, 2019 10:06PM ET
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Citing data on China, I would like to know the volume of government injections
David David
David9 Jun 02, 2019 10:06PM ET
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The chinese people have a lot of savings and they have endure hardship before, so China is well prepare. If Trump don't plead China to get back on the table soon, our market will head down down down, then China will strike and dump all the treasuries. That scenario will put us in deep deep recession. We might experince the Lost Decade.
bomz bomzov
bomz bomzov Jun 02, 2019 10:06PM ET
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David David  I am pleased to buy bonds for half the price. do you have some waste US Treasury bonds?
LI SH
LI SH Jun 02, 2019 10:06PM ET
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David you’re dreaming...
Ronin Trader
Ronin Trader Jun 02, 2019 10:06PM ET
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China will never sell their treasury of bonds? Why? Because they lose money. We have their money not the other way around. If anything they should worry about the US defaulting.
Fred Smith
Fred Smith Jun 02, 2019 10:05PM ET
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USA needs to increase tariffs on communist China and Mexico. Trump should cancel trade meetings until next year.
Show previous replies (4)
Gary Gee
TheGman Jun 02, 2019 10:05PM ET
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i tried last week, but unfortunately he's not interested in debate. just interested in posting more state media pr rhetoric
Gary Gee
TheGman Jun 02, 2019 10:05PM ET
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and by more i mean multiple times per hour on different threads
Jon PN
Jon PN Jun 02, 2019 10:05PM ET
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No Fred:) POTUS needs to cut off communist China and Mexico completely. We don't need the imported garbage from these countries (India too) who violate the basic human rights of it's own citizens to manufacture decreed goods. I don't believe for a second the results of the tariffs will pass to consumers... no, we're not going to purchase it.
Jon PN
Jon PN Jun 02, 2019 10:05PM ET
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David, how exactly have your people been prepared for the Long March? let's interpret what your leader means. He means the tariffs are going to make the quality of life difficult for the Chinese people. Sad really.
Gary Gee
TheGman Jun 02, 2019 10:05PM ET
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pretty sure I triggered the great firewall of china. probably won't hear back ....could be wrong tho. i had a hunch it'd be pretty aggressive tho
Rob Fordham
Rob Fordham Jun 02, 2019 10:05PM ET
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Trump has killed this market. Everytime u think there is hope he kills it with a tweet. Time for him to go
David David
David9 Jun 02, 2019 9:25PM ET
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Time to sell all stocks and invest in Bitcoins.
LI SH
LI SH Jun 02, 2019 9:25PM ET
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Just you know, CCP barred Bitcoins access in China, why? They know they’ve been printing candy paper
David David
David9 Jun 02, 2019 9:23PM ET
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Trump is taking worldwide markets into recession.
Rob Fordham
Rob Fordham Jun 02, 2019 9:23PM ET
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Yep time to bail
 
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