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Investors take stock of US Trade Policy and see stocks fall, bond sales abate

After a turbulent week, investors were greeted with calm Friday, after the confusion surrounding U.S. Trade Policy and a global increase in borrowing costs. A steep selloff of bonds subsided and currencies stabilized, although stocks followed Wall Street lower.

Overnight, the Nasdaq confirmed that it had been in a corrective phase since its peak in December last year. U.S. stock markets are facing headwinds due to a dimming outlook for growth in the largest economy in the world and uncertainty surrounding President Donald Trump's trade policies.

Trump suspended on Thursday the 25% tariffs that he had imposed on most goods coming from Canada and Mexico, until April 2, the date he threatened to impose an international regime of reciprocal duties on all U.S. Trading Partners.

Trump's rapidly changing trade policy has sent the markets into a tailspin. However, currencies such as the yen, the Swiss franc and gold have been some of the few assets that investors have sought out as they look for safety.

The Japanese yen was near its highest level in five-months at 147.95, and on course for a weekly gain of 1.8%, while the Swissie reached a new three-month high of 0.8822 to the dollar.

The gold price dropped slightly but was still close to a record at $2,904.62 per ounce.

Tony Sycamore is a market analyst with IG. He said that the rapidly shifting sands from U.S. Tariffs have turned into quicksand, which businesses in Canada, Mexico and the U.S. are drowning in.

I'm not very confident about investing money in the market at this time because there is so much uncertainty. "It's a terrible, horrible environment for investors to operate in."

The sharp decline in European bond prices, triggered by Germany’s massive spending plan, showed signs of easing on Friday. Bund futures rose more than 0.8% while French OAT futures rose 0.7%. Bond yields are inversely related to bond prices.

In Japan, the government bonds continued to be sold, but at a lower level than during the previous session.

The yield on the 10-year Japanese Government Bond (JGB) rose by 1.5 basis points, to 1.53%. This is its highest level since 2006. Meanwhile, the yield on the 20-year bond increased by 2 bps, to a record high of more than 16 years, 2.22%.

The euro has been on fire this week due to the surge in European borrowing rates. It is expected that the currency will have its biggest weekly gain in almost five years by Friday, at over 4%. It was last trading 0.07% higher, at $1.0794.

The European Central Bank cut rates again on Thursday, but warned that "phenomenal uncertainties" could lead to inflation. This includes the possibility of trade wars or increased defence spending.

Mark Wall, chief European Economist at Deutsche Bank said that the ECB is in a difficult position due to the imminent threat of U.S. Tariffs. This could lead to further policy rate reductions - or even a move towards stimulative territory – and the increasing commitment for higher defence expenditures over the next few years.

This environment calls for a deft touch on the monetary lever, and the preservation policy flexibility.

ASIA STOCKS UPBEAT

MSCI's broadest Asia-Pacific share index outside Japan traded at 0.5% lower last week, but was on course for a gain of over 2.5% in a single week, the largest weekly increase since nearly six months.

Investors continued to pour money into shares of artificial intelligence and were encouraged by Beijing's new policy.

The blue-chip index of China, the CSI300, fell by 0.2% but is expected to gain 1.5% this week. Meanwhile, the Shanghai Composite Index is also on course for a weekly gain of 1.85%.

Hong Kong's Hang Seng Index grew 0.3%, and was on track for a weekly gain of more than 6%.

Goldman Sachs analysts wrote in a report that they expect fiscal easing to be significant this year. They also said there would be a greater focus on high-tech manufacturing and consumption.

Japan's Nikkei fell 1.85%.

Investors will be focused on the February U.S. Nonfarm Payrolls Report, which will give them further insight into the health of the largest economy in the world.

After January's 143,000 job gains, 160,000 new jobs are expected to have been created in February.

Investors are betting on more Federal Reserve rate cuts in 2019. This is due to a series of disappointing U.S. data and concerns about Trump's tariffs. Fed funds futures show just under 77 basis points of ease priced into this year.

The dollar has also been pushed down, and is expected to drop by more than 3% in a week against a basket.

Brent crude futures rose 0.27%, to $69.65 a barrel, while U.S. West Texas intermediate crude futures rose 0.2%, to $66.49 a barrel. (Reporting and editing by Jamie Freed; Rae Wee)

(source: Reuters)