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In a market wrap, analysts at TD Securities noted that the markets are taking President Trump’s declaration of new tariffs in stride with broad gains in North American equities (SPX: +0.5%, TSX: +0.7%) following a similar risk-on session in Europe.

Key Quotes:

“Treasuries bear-steepened on a sharp (7bp) selloff in 30s while Canada outperformed by ~2bp across the belly and long-end.”

“USD performance was more mixed with JPY (-0.4%) trading lower on the better risk backdrop while CAD (+0.5%) rallied on reports that NAFTA talks are to resume on Wednesday.”

“AUD (+0.5%) also outperformed despite the new tariffs while EUR (-0.1%) and GBP (-0.1%) saw modest declines.”

“The BoJ, NZ Current Account, and a speech by the RBA’s Kent will provide the regional focus for Wednesday’s event calendar.”

What we’re  watching in markets
“Risk appetite remains well supported despite the latest escalation in the US/China trade war. While the latest round avoided the worst-case scenario, we are starting to wonder if trade tensions are now fully priced – or close to it. If so, it could leave the USD vulnerable heading into Q4.”

“If correct, we think AUD/USD and NZD/USD could be prime candidates for a short squeeze in the weeks ahead. A floor may already be in place for both pairs. The local macro and technical backdrops have started to improve and positioning looks stretched. We don’t think it will take very much to send both higher.”

“We have entered into a position to receive US 5y5y swaps in order to fade the recent selloff. While the initial selloff was driven by global factors we think ECB forward guidance and YCC will contain Bunds and JGBs, and the Fed is well priced for hikes in September and December.”

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