“All’s Well That Doesn’t End In A Giant Mushroom Cloud”

Well, you know what they say, “all’s well that doesn’t end in a giant mushroom cloud.”

That’s how it feels on Wednesday morning after Chinese TV reported that President Xi Jinping had a phone call with Donald Trump during which the two discussed North Korea and Syria. On Syria, Xi said using chemical weapon is unacceptable and as far as everyone’s “problem child” in Pyongyang is concerned, Xi said the issue should be solved via talks. But that didn’t keep Party mouthpiece news outlets from essentially threatening North Korea and it didn’t keep this headline from hitting the terminal overnight:

CHINA SAYS ESCALATING SITUATION ON KOREAN PENINSULA “DANGEROUS”

Trump and Xi both expressed the necessity of staying in touch.

That appeared to be just enough to keep things from falling apart overnight, as the yen erased gains and halted its record winning streak against the euro, with longer-term investors fading the latest move.

See that move lower just before the blue square? Yeah, that was faded. “Risk sentiment took another hit earlier Wednesday after the latest comments from U.S. President Donald Trump administration over North Korea and Syria boosted the Japanese currency versus its major peers [and] while the immediate outlook appeared to yen-supportive, interest to fade the latest rally was seen,” European FX traders tell Bloomberg. Specifically, “macro accounts and interbank traders with a medium-to- long term horizon have been selling into yen strength since it traded past 109.70 versus the dollar and approached the 116.00 handle against the euro.” One also imagines some folks are taking profits ahead of pre-holiday illiquidity.

Meanwhile, the Bloomberg Dollar Spot Index is little changed and 10Y yields are trading close to this year’s low as demand for haven assets is still steady. Here’s some really good commentary from SocGen on all of this:

Geopolitical tensions are keeping a firm lid on US real yields, and a firm bid under the yen. If all I do is eye-ball relative real yields in the morning, I see no reason for USD/JPY to stop this side of 108. 2.29% this morning on nominal US 10s sees them below their recent range and real yields are 37bp now. Only a fall in US nominal yields to 1bp is avoiding the relative picture being even uglier but that just highlights the BOJs impotence in the face of lower global (US) yields.

Does this throw up opportunity? The global economy is trundling along steadily enough, and maybe a final purge of all bearish bond sentiment will cleanse the market. Maybe North Korea and Russia-focused political tensions will blow over. And maybe then USD/JPY can drift back up in what now looks like a broad 100-120 range. But that’s too many “maybes” for this time of the morning. Watch, wait, and prepare to go long EUR/JPY in the next few weeks.

Meanwhile, oil is looking to build on its longest winning streak since December after yesterday’s Saudi “let’s extend these cuts” headline and a reported 1.3m bbl API draw. Watch the EIA number this morning. Of course at the end of the day, the story is the same as it ever was. “Extending production cuts beyond June is gathering momentum,” Jonathan Barratt, chief investment officer at Ayers Alliance Securities in Sydney said on Wednesday before noting the obvious: “The problem is, as prices climb higher, U.S. shale producers will pump more.” Again, up the down escalator.