The trade spat between the US and China took an interesting turn yesterday when Beijing threatened to restrict rare earth mineral exports to the US. 

The metals are used in many different industries such as electronics, oil refining and renewable energy. China accounts for roughly 70% of the world’s output of the minerals. The very fact that China played that card highlights how serious the situation has become. Equity markets in Europe and the US endured heavy losses on the back of the news, and trade tensions have reached new heights. The Trump administration will have to carefully consider its next move.

The fear is evident by the moves in the bonds markets. The yield on the 10-year US government bond dropped to 2.21% a fresh 20 month low, while the 3 month bond yield touched 2.36%. The fact the longer-dated bond yield has dropped below the short-term bond yield has spooked investors as that phenomenon has historically forewarned recessions.

Asian stock markets lost ground last night as trade tensions weighed on sentiment. The Peoples’ Daily, China’s largest newspaper said ‘don’t say we didn’t warn you’ in the commentary in an article warning the US about potential restrictions on rare earth minerals. It was reported the US government are looking into reducing their dependence on the metals.

The step up in the trade spat comes at a time when the Italian government and the EU are embarking on their latest fight. Brussels wants the government in Rome to tackle its debt issue, while Matteo Salvini, Italy’s joint deputy prime minister appears happy to dig his heels in and resist the pressure. The war of words has rattled the Italian debt market and that has sparked fears about a possible debt and banking crisis in Italy, and the wider eurozone. The bond markets in Europe were in focus too as the yield on the German 10-year fell to a level not seen since 2016. The bond markets are highlighting the fear held by traders, and the stock markets are acting accordingly.

The eurozone isn’t in great a state. German unemployment ticked up to 5%, from 4.9%, and it was the first increase in the jobless rate since November 2013. The Germany manufacturing industry is stuck in a severe contraction, and global trade tensions are a factor. The US has left the EU off the hook for now in terms of raising tariffs, but that’s not to say they won’t turn their attention on the EU car industry towards the end of the year. Yesterday, French CPI dropped to 1.1% from 1.5% in April, and this is a sign that demand is cooling.

Brent crude and WTI suffered major losses yesterday as traders are worried about demand levels given the trade woes. Should the US and China drag each other down, they are likely to drag the rest of the world lower with them. Last night, the American Petroleum Institute posted the latest US stockpile data, and it showed a draw of 5.3 million barrels. The Energy Information Administration report will be released at 4pm (UK time) and the consensus estimate is for a draw of 800,000 barrels.     

The Bank of Canada (BoC) kept rates on hold yesterday at 1.75%, meeting forecasts. The central bank cautioned that global trade tensions casts doubt over the world economy, and the bank will continue to monitor household spending and the oil markets. The update sent the USD/CAD to its highest level since January.

Spanish inflation will be released at 8am (UK time), and the consensus is for it drop to 1.1% from 1.6% in April. 

At 1.30pm (UK time) ,the second reading of the first-quarter US GDP will be announced, and it is tipped to be revised lower to 3.1% from 3.2%. The jobless claims report will be announced at the same time, and economists are anticipating a reading of 215,000.

EUR/USD – has been broadly pushing lower since early January, and if the negative move continues it might target the 1.1000 area. Resistance might be found at 1.1322.  

GBP/USD – has been driving lower since mid-March, and if the bearish move continues it might encounter support at the 1.2600 region. The 200-day moving average at 1.2956, might act as resistance.

EUR/GBP – has rebounded for over two weeks, and if it holds above 0.8800, it might bring 0.8939 into play. A move to the downside might bring the 50-day moving average at 0.8645 into play. 

USD/JPY – while it holds below the 100-day moving average at 110.55, its outlook should remain bearish, and support might be found at 108.50. A rally might target the 112.00 region.

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