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Treasury Yield Surged on Abating Global Risks and Bets on Bottoming in Economic Slowdown

There were so many high profile events last week. In the end, the positive ones were more than enough to offset the negative ones. US-China trade truce was extended indefinitely and it looks closer than ever to have deal. MSCI’s increase of weighting of Chinese stocks gave China another huge boost. Chance of no-deal Brexit faded much with UK Prime Minister Theresa May’s new arrangements. On the other hand, escalation of Pakistan-India tensions and the collapse of Trump-Kim summit in Vietnam just gave the markets very brief impact.

While economic data released during the week were mixed, talks of bottoming in global slowdown emerged, as risks are abating. The turn in sentiment pushed treasury yields sharply higher. Yen suffered broad based selloff as yield gaps widened sharply, with 10-year JGB staying negative. Though, Canadian Dollar took the weakest spot as much weaker than expected Q4 GDP suggested that its economy could be left behind by others. Late selloff in oil prices also did no favor to the Loonie. Sterling ended as the strongest, followed by Euro. But late strength in Dollar suggests that it’s catching up very quickly.

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Progress made in US-China trade talks, but nothing is done until everything is done

It appeared that sufficient progress were made in US-China trade negotiations to convince Trump to announce extension of trade truce indefinitely early last week. The news set a positive tone for the global financial markets, in particular in China. US Trade Representative is going to publish formal notice in the Federal Register next week, confirming that the rate of additional duty for the products covered by the September 2018 action will remain at 10 percent until further notice.”

Comments from the US official regarding the negotiation were generally positive even though USTR Robert Lighthizer sounded cautious. In his testimony to House Ways and Means Committee, Lighthizer said “real progress” were made and US could “turn the corner” in the economic relationship with China”. But “much still needs to be done” before an agreement is reached, and “more importantly, after it is reached.”

Treasury Secretary Steven Mnuchin, said the team is working on a 150-page, very detailed, document for “significant”, “structural” commitments from China. Mnuchin hoped to “make progress this month”. And, “if we do, there will be a summit of the Presidents”. National Economic Council Director Larry Kudlow hailed that “Lighthizer has worked miracles on this Chinese deal,” and “we’ve never come this far on China trade.”

However, as usual with any deal, it’s agreed only when everything’s agreed. Trump indicated in a tweet on Saturday that he made a sudden request to China to “immediately” remove all tariffs on American agricultural products. He claimed it’s “based on the fact that we are moving along nicely with Trade discussions”, and he didn’t increase the tariffs on March 1.

It’s uncertain what China’s response to Trump’s request would be. From China’s point of view, the logical equivalent response to Trump’s refrain from more tariffs is not to impose retaliation measures of their own. And China has already made some good-faith purchases of US soybeans since the start of trade truce. Chinese leaders could have their own rationales in rejecting Trump’s requests. The negotiation could turn down hill if China does say “no”.

And as a recap, Trump said after the summit with North Korean leader Kim Jong-un collapsed that “I am always prepared to walk,” and “I’m never afraid to walk from a deal, and I would do that with China, too, if it didn’t work out.” He walked away from a deal with Kim after traveling all the way to Vietnam. He can certainly walk away from a deal with China sitti