Canada has retaliated by imposing tariffs on imported American goods worth C$29.8bn from Thursday. These latest retaliatory measures are in addition to the counter-tariffs announced on 4 March by the Canadian government on C$30bn worth of goods imported from the United States in response to the first round of 25% tariffs imposed by the Trump administration on Canada.
Canada avoided an additional 25% tariff on steel and aluminium following Ontario's decision to waive a 25% surcharge on electricity exports to the US. The Bank of Canada has noted that, despite stronger-than-expected economic growth in 2024, the widespread uncertainty caused by US tariff threats is restraining consumer spending and businesses’ plans to hire and invest. Against this background, and with inflation close to the 2% target, the Bank of Canada decided to reduce its policy rate for the seventh time in a row, by a further 25bp to 2.75%.
Rates: after last week's selloff, further consolidation of € rates in the absence of news on the German and European fiscal plan. All-round flattening of € curves, with the yield for the 10Y Bund shedding 2bp to 2.88% coming off a session high of 2.90% on Tuesday. At the short end, yields continued to rise as ECB rate cut expectations faded, with the market anticipating fewer than two cuts this year (45bp priced in) following comments by Christine Lagarde, who warned that “trade fragmentation and higher defence spending in a capacity-constrained sector could in principle push up inflation”. As for sovereign spreads, the tightening trend continued, with the 10Y OAT- Bund spread narrowing by 1bp to 68bp, at its tightest since July 2023.
Equities: after a volatile session, equity markets closed in the green yesterday, buoyed by optimism over a possible ceasefire in Ukraine. In Europe, insurance, industrials and banks outperformed while retailers massively underperformed (-6.8% in the case of the SXXE), dragged down by Inditex. The DAX continued to outperform (Siemens and Rheinmetall AG +9% yesterday). US equities were poised to outperform their European counterparts, with February inflation data a touch below expectations. The V2X pulled back below 22 yesterday after testing 25 on Tuesday.
Credit: while iTraxx indices did tighten close-on-close (-1bp for the Main), there was a reversal of the trend in the afternoon after the US open. Cash spreads ended around 1bp wider in the case of seniors, with cyclicals underperforming against the backdrop of the tariff risk (around 3bp widening by carmakers). Even the Renault SA and RCI spreads ended the day wider, despite S&P raising the outlook on the issuer’s rating to Positive (from Stable). On the other hand, the spreads of automotive suppliers ended the day a little tighter, particularly in the case of ZF (5bp-10bp tightening).
FX: the DXY dollar index rose 0.13% to 103.4, snapping a run of seven consecutive declines, bolstered by lower-than-expected US inflation (core CPI at +0.2% MoM vs. +0.3% MoM). The Canadian dollar was the G10 currency that posted the best performance against the US dollar, appreciating by 0.36% (USD/CAD at 1.44). The Bank of Canada cut its policy rate by 25bp to 2.75%, as expected, but did not signal any further rate cuts. The euro held steady at 1.092 against the US dollar, one day after setting a five-month high at 1.0947. Sterling appreciated against the US dollar (+0.26%) and the euro (+0.24%). With investors awaiting the conclusion of the annual ‘shunto’ wage negotiations on Friday, the US dollar firmed against the Japanese yen, putting on 0.40% to 148.3. Turning to emerging currencies, the South African rand was the biggest underperformer against the dollar, losing 0.76% (USD/ZAR at 18.32), as disagreements within the ruling coalition persisted despite the Finance Minister proposing a much reduced VAT hike in the revised budget presented yesterday.
