Trump backtracks on Friday's threat to impose 50% tariff on EU. Euro Stoxx 600 index up 1%, S&P500 futures up 1.3%; US 10-year Treasury future unchanged, reversing move in NZ session

Markets have been quiet and newsflow overnight has been light, with the US and UK on holiday.  Some trade war de-escalation between US and the EU has supported equity markets. The NZD and AUD have pulled back from fresh year-to-date highs seen during the NZ trading session.  The NZD is back down to 0.60.

Following President Trump’s threat on Friday to impose a 50% tariff on the EU, after saying the region was difficult to deal with, he agreed to extend the deadline to 9 July after talking with EC President von der Leyen. The trade war de-escalation between the US and EU after escalating it on Friday, has caused some market volatility and temporarily diverted attention away from concerns about the state of US fiscal policy, which was last week’s theme. Many commentators have noted the backdown in the threat by Trump just follows his usual playbook, while continuing to affect uncertainty about the economic outlook.

The US cash market is closed but S&P futures are up 1.3%.  The Euro Stoxx 600 closed up 1%, reversing Friday’s 0.9% decline.  US Treasury futures opened weaker, equivalent to about a 5bps lift in the 10-year rate, but reversed course overnight to close flat at the end of the European trading session.

The USD was broadly weaker during the NZ trading session but has reversed course overnight.  Bloomberg’s dollar index fell to its lowest level since July 2023 but is now flat for the session.  The NZD broke above the late-April high to trade at a fresh 2025 high of 0.6032 yesterday mid-afternoon, before reversing course and it currently trades close to 0.60. This can only reinforce 0.6030 as a short-term resistance level. The AUD traded at a fresh 2025 high of 0.6537 and has fallen back down to 0.6485, leaving it flat for the day, while NZD/AUD has nudged up to 0.9255.

Of the other majors, EUR and GBP are slightly stronger and JPY and CAD are slightly weaker, but net movements have been contained to within 0.2% from last week’s close. ECB President Lagarde gave a speech in Berlin which included comments about the role of the USD as a reserve currency.  She said “there is even uncertainty about the cornerstone of the system: the dominant role of the US dollar…with the euro as the world’s second-largest currency, there is another international currency alongside the dollar. But this has not yet convinced investors”.

On a similar topic, but with regards to the yuan, Bloomberg reported that the PBoC has asked major lenders to increase the share of the yuan in cross-border trade transactions to 40% from 25%. While not mandatory, banks missing the target often receive a lower score in any regulatory review, which will impact their future business expansion.

The holiday trading conditions give more time and space to note articles of interest that wouldn’t normally make the cut for this daily report, most of them bad news.  The FT notes that China has improved its ability to launch a sudden attack on Taiwan, with faster-paced air and operations, new artillery systems and more alert amphibious and air assault units. Great, add World War III to your bingo card.  The WSJ notes how millions of Americans suddenly owe billions in student debt after years of forbearance and delinquency rates are now back to pre-COVID levels. There is also a neat article spelling out the impact of tariffs, using patio furniture as an example, showcasing one importer who de-constructs the new price based on tariffs on steel and Chinese goods.  On three different products, proposed new prices will rise by 8%, 15% and 18%.

The domestic trading session was quiet, with rates nudging lower on global forces.  NZGB yields were down 1-4bps across the curve and swap rates were 1-3bps lower. Focus is squarely on the RBNZ’s MPS update on Wednesday, where a 25bps rate cut is fully priced and interest lying in the tone of the update. This morning, BNZ gave notice of reducing variable mortgage lending rates by 25bps from next week while fixed home lending rates were nudged down to fresh cycle lows, effective immediately.

In the day ahead, only second tier data are released.  Of most interest will be US consumer confidence and the breakdown of the survey, following the recent plunge in confidence and the rollback of US-China import tariffs earlier this month.