The US-China trade tensions appear to be easing, with both countries agreeing to tariff reductions. The US will lower its tariffs from 145% to 30%, while China will cut its duties from 125% to 10%, starting on 14 May.

This initial agreement suspends additional 24% tariffs for 90 days, offering time for further negotiations. However, should these additional tariffs resume, China’s GDP growth could reduce by about 1.0ppt over the next year.

Fiscal Measures To Counter Tariff Impact

To counter the tariff impact, China may roll out a fiscal package approved in March, offsetting some economic effects. Without further fiscal measures, GDP growth could face moderate risks, with expectations set at 4.8% by 2025.

China’s recent monetary policy easing aligns with economic expectations, potentially leading to another policy rate cut in Q4. With global tariff wars causing deflationary pressures, China’s CPI inflation forecast for 2025 is adjusted to -0.1%, down from 0.7%.

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The recent easing of trade tensions between the United States and China, marked by a mutual agreement to drastically reduce tariffs starting 14 May, introduces some temporary relief. The US plans to reduce import taxes from a punitive 145% to a lower 30%, while China is set to bring its own duties down from 125% to a more manageable 10%. A separate batch of 24% US tariffs has been shelved for 90 days, giving negotiators a window of time. This breathing space is not permanent, of course, and a return of tariffs remains on the table if talks falter.

If additional duties re-enter the frame, the latest projections indicate a measurable drag on China’s annual GDP growth—about one percentage point, to be precise. That reduction would not be spread evenly and would mostly damage trade-heavy sectors and capital formation. The country has, however, a contingency plan in the form of a fiscal stimulus programme cleared earlier this year. This package is not expected to single-handedly buffer all downside risks, but it should alleviate some of the direct strain on domestic demand and employment.

In the meantime, Beijing has already moved on the monetary front. Policymakers carried out interest rate cuts earlier this quarter, and with inflation now forecast to cling below zero for much of 2025—down from a previous estimate of 0.7% to -0.1%—the door is wide open for another adjustment, likely in the final months of this year. Lower rates and a relatively weak consumer price outlook point to a demand-side story that is not turning around quickly. In fact, deflation risks have started to feel less like a passing concern and more like a medium-term constraint.

Policy And Derivative Strategies

From our perspective, this puts a sharper focus on implied volatility, particularly across index options and rates. The soft inflation print alone won’t dictate the next move, but when seen alongside manageable FX pressures and weakening producer prices, there’s room to expect the PBOC to lean further on policy easing tools. We’ll continue monitoring the reassessment of terminal rates across Asian fixed income futures, as well as spreads on CNH forwards, which are beginning to show renewed hedging activity.

Li in particular appears to be reacting with a measured tone—consistent with a central authority keen to keep the RMB exchange rate stable without triggering unwanted outflows. For structured product positioning, we’ve been watching changes in skew on long-dated contracts, which may surprise on the low side if sentiment firms post-negotiations. Cross-asset correlation remains high, and as such, we’ll avoid chasing directional trades until further clarity emerges by early July.

We are reducing exposure to cyclical derivatives and favouring calendar spreads that price in another rate cut later this year. Upfront vega remains relatively expensive, so we are instead opting for second-half maturities that better reflect the policy lag. While some longer-dated implied vols continue to look elevated, there’s an argument for limited upside unless broader risk-on trends emerge across global equities.

What this means practically is that traders should watch closely early signals from state-linked policy banks in China and intermediate import figures out of East Asia. These typically give us a heads-up on the trade drag and are often overlooked. Margin requirements across OTC swap positions may tighten slightly if deflation persists, so it’s worth running new funding scenarios now, rather than waiting.

Corporate hedgers, particularly those in export-heavy manufacturing, may want to revisit their delta exposure for the remainder of Q2. With lower tariffs coming into play ahead of summer shipping volumes, we should see a recalibration of trade flows—but only if negotiations continue progressing in June.

Overall derivatives pricing on Asian risk remains anchored to monetary policy expectations and not just trade outcomes. So we’ll be keeping a close watch on weekly liquidity operations from the central bank, any shift in credit impulse data, and PMI figures that have lagged in recent months.

As always, model assumptions and macro inputs will tilt the outcome in either direction. But given the clarity around near-term trade duties, it makes sense to lean into strategies that transition cleanly into the third quarter once this 90-day window closes.

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China’s State-owned Assets Supervision and Administration Commission (SASAC) has urged state-owned enterprises (SOEs) to fast-track innovation and strengthen their roles in strategic and emerging industries. This is part of efforts to achieve 2025 targets and prepare for the upcoming 15th Five-Year Plan.

At an expanded Party Committee meeting, SASAC stressed the importance of high-quality development and national strategic priorities. It called for a fact-based assessment of SOE performance under the 14th Five-Year Plan to guide future reforms.

Soe Reform And Global Industry Change

The Commission noted external uncertainties and changes in global technology and industry, emphasising the need for forward-looking strategies in SOE reform, governance, and Party building. SOEs are encouraged to contribute to new productive forces and prioritise localisation in important sectors.

Enterprises should optimise their presence in strategic emerging and future industries and make advances in critical technologies. This will enhance their role in supporting national security, industrial resilience, and technological self-sufficiency.

SASAC also emphasised the advancement of major national projects. It stressed leveraging SOEs’ capabilities in strategic, foundational, and frontier sectors to reinforce the leadership role of the state-owned economy.

The State-owned Assets Supervision and Administration Commission has made a pointed call for faster innovation and a tighter focus on advanced sectors. Essentially, it’s telling large state firms to stop standing still. They are under pressure to show measurable outcomes by 2025—this is not optional, it’s policy. These companies must push resources towards industries with potential to shape the next decade: from clean energy and semiconductors to biotech and high-end manufacturing. The goal here isn’t only growth, but long-term resilience.

High Quality Development

The emphasis on “high-quality development” isn’t just a slogan either. It refers to prioritising innovation and strategic positioning over sheer volume or scale. As it stands, this means trimming dependency on external tech sources while better managing state influence in corporate strategy. This is especially relevant with the looming 15th Five-Year Plan—it will likely demand clear progress on technological advancement and industrial upgrade. Any pause in preparation would be misplaced.

We recognise the directive to ‘localise’ in core sectors for what it is: a push to break away from key import dependencies, especially in areas where advantages lie with foreign suppliers. It isn’t about protectionism so much as building internal substitutes where gaps clearly exist. The wider implication is that capital will likely be shifted away from legacy sectors and poured into R&D-heavy industries where breakthroughs are both possible and needed.

Elsewhere, the demand for companies to support “new productive forces” likely signals larger investment into areas such as AI applications, advanced robotics, and next-generation information networks. From where we sit, this is a cue to begin adjusting exposure to firms and sectors anticipating state-backed priority. You’re not betting on volatility here—you’re aligning with a policy trend that features very clear directives and timelines.

We can also take something from the way the Commission framed the role of governance and Party oversight. It’s not just internal housekeeping; it’s positioning for reform. That includes management accountability, sharper risk controls, and tighter alignment with national strategy. For us, that reads as less room for improvisation and more for structured, policy-aware execution plans.

With this kind of tone from the top, the flow of capital—from both policy banks and institutional channels—is going to guide where productive efforts land. We’re already seeing this in energy storage initiatives and advanced industrial chains. Asset managers should be adjusting accordingly.

Taken in full, these remarks strongly suggest a shift in expectation rather than a subtle nudge. SOEs are being instructed to deliver proof of progress, grounded in hard numbers and measurable change. That shift isn’t something to trade against; it’s a map for positioning over the coming months.

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Germany’s ZEW Economic Sentiment index for the current situation fell below forecasts in May, recording a figure of -82 compared to the expected -77. This indicates a more challenging economic environment than anticipated.

The United States Consumer Price Index (CPI) inflation report for April is due to be published by the Bureau of Labor Statistics at 12:30 GMT. The forecast suggests that the inflation index will rise at an annual rate of 2.4%, consistent with March, while core CPI inflation is predicted to remain at 2.8% year-over-year.

Market Sentiment and Risk Assets

Markets experienced a revival as the US and China paused their trade war escalation, creating a notable shift in sentiment. The adjustment in market mood saw an increase in trading of risk assets, suggesting optimism that recent difficulties might be easing.

Foreign exchange trading on margin entails a high level of risk and may not suit everyone due to the potential for significant losses. The leverage involved can also magnify both gains and losses. It is essential to carefully assess investment goals, experience level, and risk tolerance before engaging in foreign exchange trading.

Given the slump in Germany’s ZEW Economic Sentiment for the current situation, there’s a clearer signal of deteriorating conditions within the region. A print of -82, noticeably under the forecasted -77, underscores a wider level of dissatisfaction among institutional investors and analysts when assessing current economic health. This type of reading often foreshadows a drag on near-term economic activity. It’s not just a one-off dip—it follows previous soft patches, suggesting sentiment hasn’t recovered from past shocks.

What that means for us more broadly is that European markets could carry more downside than upside catalysts until data starts showing consistent strength. Bonds and rate-sensitive assets may respond to these disappointments with more demand, particularly on the safer end of the curve. Equities, on the other hand, may find it harder to hold ground unless we see signs of improving industrial output or policy support.

US Inflation and Market Reactions

Now, turning across the Atlantic, all eyes sit squarely on the April inflation release in the United States. Expectations are for annual inflation to remain at 2.4%, while the core figure is projected to hold steady at 2.8%. Should either component overshoot, traders should be ready for volatility. It wouldn’t take much—particularly with rates sensitive to even slight changes in inflation sentiment—to spark new positioning among institutions.

If the report aligns exactly with consensus, it implies that disinflationary forces aren’t gaining traction quickly enough. For those exposed to rate speculation, especially in options and futures markets, a flat core reading keeps the Federal Reserve in a holding pattern. Any considerable undershoot, however, would be pivotal—suddenly, the discussion around rate cuts could gain tangible timing. The market would likely interpret it as a green light to accelerate bids in shorter-dated treasuries, alongside a quick repricing across interest rate derivatives.

With the temporary cool-down in tensions between the US and China, we’ve observed early signs of reinvigoration in global risk appetite. Positioning in equity-index futures and related volatility products seems to have turned a corner. It’s not just the pause in tariff threats; liquidity has responded favourably, and inflows into high-beta sectors show that traders perceive better short-term reward potential. Still, the optimism hinges heavily on the data backing it up.

Shifting toward the engine room of risk—foreign exchange—no reminder is too many when it comes to ignoring leverage dangers. We remain highly alert here. Movements in major crosses may seem subtle one day, but the use of leverage means exposures can turn rapidly and unpredictably. Losses can far exceed deposits when volatility picks up around key macro events, and we should assume more surprise prints from data releases in the near term.

Therefore, as we enter a cycle of clustered major releases—from inflation to purchasing managers’ indices—it is critical to constantly reassess directional bias. Carry trades may become more appealing in low-volatility settings, but should inflation move unexpectedly or geopolitical headlines resurface, a swift unwind would not be uncommon.

Instruments with embedded optionality or knock-out features are likely to be tested. We advise closely monitoring implied volatility pricing, especially in G10 crosses, as well as any shift in the forward curve for yield-based instruments. These can provide early insights into market recalibration when economic assumptions are challenged.

We’re watching for more than just data surprises—we’re mapping how divergences in economic momentum between major economies play out in pricing actions. Traders should prepare for well-defined ranges suddenly breaking as consensus disintegrates. Timing will matter, but so too will patience.

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China is constructing megaports in South America to address its crop demands. The country assures its citizens of a stable food supply even without relying on U.S. crops.

China’s state grain trader, Cofco, plans to establish the world’s largest export terminal in Brazil. This initiative aims to replace U.S. soybeans and other foodstuffs by tapping into South American resources.

Challenges Facing Brazil’s Export Capacity

However, Brazil’s main export port to China, Santos, faces limitations regarding capacity and infrastructure. Furthermore, Brazil grapples with fertilizer supply challenges and soil nutrient depletion, affecting crop production advancement.

In diplomatic moves, China’s foreign minister recently held discussions in Beijing with Brazil’s counterpart. Additionally, China expressed its intention to purchase approximately $900 million worth of soybeans, corn, and vegetable oil from Argentina.

What we’ve seen so far points to a clear strategic shift. By financing and building mega ports in South America, and by arranging deals in both Brazil and Argentina, China is working to reduce its reliance on U.S. agricultural imports. The announcement from Cofco to invest heavily in Brazil indicates more than just trade preferences – it shows long-term positioning.

This sheds light on China’s broader tactic: reshaping its supply chain for food security reasons. Notably, Brazil has the land and the harvest volume, but the ports, especially Santos, are already under pressure. Bottlenecks caused by limited infrastructure mean expansions can’t deliver overnight shifts in global flows. The soil health concerns, specifically regarding nutrient exhaustion and fertiliser scarcity, aren’t just minor agricultural hiccups. They alter the reliability of yields. If production fails to meet projected growth in the next few seasons, it could undermine China’s expectations.

Implications for Global Commodity Markets

The involvement of high-level officials further strengthens the trade commitment, particularly with Argentina. A $900 million offer sends a focused message – Beijing is not hesitating to secure supplies in two of South America’s key producers, even if it comes with logistical or qualitative compromises. These moves also steadily shift bargaining power in global commodity markets, and with that, new patterns in price sensitivity and volume liquity start to form.

For us, this instability in the traditional supply chain doesn’t signal immediate price disruptions, but it does reframe where risks will surface. If these port investments in Brazil proceed as planned, and volumes rise as intended, basis prices across regions may separate more than usual. Meanwhile, uncertainty around Brazilian production capacity – from weather to soil inputs – leaves any smooth transition less than assured.

Given these developments, attention must be given to freight capacity from South America, reliance on river transport, and any farmer response to fertiliser pricing. With attention tilted toward Argentina as well, we anticipate two harvest windows – Brazilian and Argentinian – to carry more weight in market pricing than before. Differentials between U.S. and South American futures may widen on timing alone, let alone on quality or availability.

An increase in long hedges from Chinese buyers across South American origin will likely affect open interest positioning too. Dislocations could arise if investors underprice Brazil’s potential shipping delays or if Argentina faces political changes that block exports. Early indicators of port congestion or fertiliser shortage should be monitored closely and used to reassess spreads, particularly into Q4.

We are entering a cycle where conventional models based on U.S. exports may underperform. Assumptions on average port throughput, barge movements, or input costs in South America may no longer apply with the same confidence. It’s now less a question of transition, and more of competition.

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The Euro (EUR) may weaken further against the US Dollar (USD), but it is unlikely to breach the major support level at 1.1055. In the long run, while EUR is under pressure, whether the current pullback reaches 1.0945 remains uncertain.

On a 24-hour view, EUR dropped to a 1-1/2-month low at 1.1087, down by 1.42%. Despite oversold conditions, further USD weakening is possible, but breaking the major support at 1.1055 is unlikely. Resistance levels are identified at 1.1120 and 1.1150, which would indicate stabilisation.

One To Three Week Perspective

In a one-to-three-week perspective, last Friday’s shift from neutral to negative outlook anticipated EUR falling towards 1.1145. The decline exceeded expectations, reaching a low of 1.1064. Although downward momentum has grown, the current weakness is seen as part of a pullback, and reaching support at 1.0945 is uncertain. Only a break of 1.1225 suggests easing pressure.

This analysis involves risks and uncertainties, with no guarantees of flawlessness or timeliness. Market investments carry risks, including potential total loss and emotional distress, and all associated responsibilities lie with the individual. Users should carry out thorough research before making decisions.

What the current analysis demonstrates is a downward pull in the Euro’s value against the Dollar, though we’re seeing a fairly strong cluster of support forming around the 1.1055 level. Even with a sudden slump touching 1.1087, the structure beneath that point is robust enough that further rapid declines aren’t projected to slice through it without compelling catalysts. It isn’t about whether the Euro is weakening—it certainly is—but rather how far existing momentum can carry that weakness before counter-forces temper it.

We saw the Euro fall 1.42%, settling near the lowest level in around six weeks. That drop is stark, even if some technical conditions now suggest oversold territory. When viewed through a broader lens though, the probability of continued Dollar strength may reinforce local EUR softness. Yet, resistance at 1.1120 and 1.1150 appears very near the surface. Those zones are important—should price action rebound and climb there, it could indicate a brief footing is being found.

Directional Shift

Now looking ahead one to three weeks, we noticed a directional shift recently. The stance moved from neutral to bearish just before the weekend, and since then the pace of decline has been sharper than initial forecasts. Last week’s expectation was a moderate dip toward 1.1145, but 1.1064 came swiftly, suggesting bearish pressure intensified more than anticipated. Even with this momentum, this move still qualifies more as a short-term retracement than a true reversal of longer-term structure. The idea that the Euro might reach the next lower support around 1.0945 hasn’t yet formed into a high-conviction outcome.

That support below is worth keeping an eye on, but we’d hesitate before planning strategy around its inevitability. Too many assumptions, without fresh catalysts or shifts in macro data, would simply inject excessive exposure to sudden turns. Similarly, if prices manage to press above 1.1225 again, it would be the first solid sign that this current phase of weakness has passed.

From where we sit, the signals are mixed: firm downside action, yes, but not without areas where rebounding price could be met with stiff resistance. This subtle balance leaves very little room to operate overnight with high certainty. Rather, it encourages a trim, reactive posture that adjusts to each incremental change in price behaviour rather than predicting wholesale shifts.

For positioning, one must be very deliberate here. Overleveraging based on presumed directional continuation risks poor entry and frustrated exits when structures such as 1.1055 either hold tight or trap into limited range. These situations usually require trade entry based more on exhaustion cues than momentum chases. For example, until 1.1225 is reclaimed, any upside attempt is likely confined to the zones already mentioned—no further until those resolve.

We continue to monitor short flows into the lower 1.10s and note whether positioning gets uncomfortably crowded. That often hints at pent-up reversal potential that can catch short-duration trades flat-footed. At the same time, assumptions of a bottom forming too early can derail any attempts to carry trades across brief countertrends. One keeps watch of both ends.

As prices walk this narrow line between continued weakening and holding steady, there’s no benefit in over-committing before technical signals align with fundamentals. It’s the type of sequence where technical levels—like 1.1055 and 1.0945—matter more than sentiment or thematic views. It becomes a case of tactical engagements, waiting for pressure build-up or release, rather than chasing fading moves.

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The Bank of Japan’s deputy governor stated that US tariffs exert pressure on Japan’s economy. Despite this, there are potential risks to Japan’s prices due to these tariffs, which could lead to both positive and negative outcomes.

Economic growth in Japan is predicted to slow to around its potential. After this period of slowdown, growth may accelerate if overseas economies resume a moderate growth path.

Output Gap Expectations

The output gap is expected to remain stable. An improvement is anticipated by the end of the Bank of Japan’s three-year forecast period through fiscal 2027.

Interest rate hikes could continue if both the economy and prices improve as projected. Though inflation expectations may stagnate temporarily, a tight job market could drive wages up.

Japan’s economy is likely to recover if the global economy grows, boosting inflation and expectations. High uncertainty surrounds these forecasts, so decisions will be made as conditions evolve.

A strong yen could negatively impact exports and major manufacturing profits. However, it could enhance household real income and improve retailer profits through reduced import costs.

Exchange Rate Volatility

Rapid fluctuations in foreign exchange can complicate business planning. Japan’s finance minister is keen to discuss foreign exchange rates with counterparts.

The article outlines remarks and projections from policy authorities concerning Japan’s current and future economic situation, especially under the pressure of US-imposed trade tariffs. Though these external shocks may weigh down production and sentiment, they also set off a chain of reactions in domestic inflation and industrial pricing. Short-term disruptions seem tolerable for now, but we should be wary — economic data from the next two quarters will matter much more than usual. The suggestion here is that currency movements and global demand might create a whiplash effect through different revenue channels and cost structures.

From a trading perspective, this opens a narrow but measurable window for directional bets. Wage growth, while still fairly weak, could stir inflation in the medium term, especially if hiring trends hit record lows again. Price momentum might sag in the near run, but we should expect stronger signals as wage bargaining trickles into consumer pricing later this year. Futures tied to Japanese government bonds and inflation-protected instruments could reflect this tightening path well in advance. Careful staggering of duration risk may be necessary.

The forecast period running to fiscal 2027, while far out, tells us that incremental steps are more likely than sharp pivots. If the output gap does start to close more steadily toward the second half of this cycle, upward pressure on short- and medium-term rates could arrive faster than many have priced in. That means even slight upward revisions in quarterly GDP or wage data will matter outsize in positioning.

On top of all this, the yen’s volatility stands out as a wild card. A stronger currency may dent overseas earnings, but there’s another layer here: lower input costs for domestic sellers could, in time, rebuild margins. We might see retail names reflecting that story before it appears in broader indices. But the window is short. Wide swings in exchange rates aren’t just annoying; they sideline investment decisions, which leads to deferred spending and changes in hedging behaviour.

Given all this, sharp moves in swaps, especially where they diverge from real economy data, may present opportunities. We should dial in closely to wage negotiations, foreign currency reserves data, and input prices, especially in manufacturing and retail. If policymakers comment more on currency intervention or trade policy alignment, that reinforces that FX intervention risk is on the table. Waiting on confirmation indicators won’t work in the short term; better to recalibrate before it becomes reactive.

Lastly, it’s worth watching how other central banks treat inflation surprises. Any shift in the yield differentials could influence carry trades around the yen, moving risk sentiment quickly. The dominoes can fall fast, and even small changes across the yield curve might present asymmetric return setups. Avoid anchoring to earlier expectations – price in flexibility, not forecasts.

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EUR/GBP maintains stability following the release of UK employment data. The UK ILO Unemployment Rate rose to 4.5% for the three months ending in March, compared to 4.4% previously.

After a six-day decline, EUR/GBP trades around 0.8420 during early European trading on Tuesday. Markets anticipate the ZEW Economic Sentiment surveys from Germany and the Eurozone for insights into institutional investor confidence.

UK Employment Data

The Office for National Statistics reported a Claimant Count Change increase of 5,200 in April, contrasting with a revised decrease of 16,900 in March. Employment Change figures show a rise of 112,000 in March, down from February’s 206,000.

Mixed wage growth data shows Average Earnings, excluding bonuses, increased by 5.6% year-over-year, below both the previous 5.9% and the expected 5.7%. Including bonuses, wages increased by 5.5%, exceeding forecasts of 5.2%.

According to reports, European Central Bank officials suggest the policy review will likely confirm existing strategies such as QE. The ECB’s commitment to “forceful action” during periods of low rates and inflation remains emphasised.

From what we’ve seen this week, the EUR/GBP has been relatively muted, brushing off the fresh labour market figures out of the UK. Stability around the 0.8420 mark, despite a modest uptick in the unemployment rate to 4.5%, suggests traders aren’t yet shifting their broader bias. That figure, while incremental, points to a slightly cooling market—nothing alarming, but worth acknowledging when shaping exposure in rates or FX-linked derivatives.

Market Reactions and Analysis

The Claimant Count ticked higher by 5,200 in April—small, yes, but in sharp contrast to the revised 16,900 drop in March. A reversed dynamic like that can jar sentiment at the margin, particularly when the Bank of England has already been leaning toward a cautious tone. Interestingly though, job creation remained positive, if decelerating. The increase of 112,000 in employment isn’t negligible, yet when compared to February’s 206,000, there’s a clear moderation in pace. We interpret this as a gentle softening, which could dampen the need for further near-term tightening while reinforcing medium-term dovish recalibration.

Wage growth metrics offer a more nuanced picture. Excluding bonuses, earnings rose 5.6% annually—under both forecast and the prior print. Including bonuses, however, we note an upside surprise: an annual increase of 5.5% versus the 5.2% consensus. That uneven pressure in pay signals a possible stickiness in services inflation, despite fading recruitment momentum. It opens the door for diverging scenarios in policy responses and urges caution when defining volatility ranges or strike selection, particularly for front-month options plays.

On the continent, the focus turns to sentiment from institutional participants via the ZEW surveys. These forward-looking gauges, covering both Germany and the broader bloc, are often picked apart for early signs of business cycle shifts. They can inform momentum trades, not merely directional plays but spread-based strategies as well. Especially with the ECB leaning on consistent messaging—continuing QE where appropriate, favouring forceful intervention if inflationary tailwinds fade—we see scope for broader consistency in their communications, effectively anchoring long-end expectations.

Lagarde and her counterparts have made it clear: they won’t flinch if easing is required. Unlike more erratic central banks, their direction points more towards controlled adjustments, not volatility reaction. That lends itself well to calendar spreads across eurozone yields and relative value setups across front-end swaps, particularly as implied vols remain well-anchored across maturities.

We believe this steadiness across both currency and policy expectations allows for short-term short gamma positioning, assuming range-bound trading holds. However, as labour signals in the UK begin to diverge from wage trends, there’s scope for sharp re-pricing if wage inflation remains embedded. That would ripple into BoE rate expectations, injecting sudden two-way risk.

Reaction among institutional players to this week’s ZEW data and any ECB commentary could provide the next catalyst. For now, two economies show signs of divergence—one softening in employment while the other relies on guidance for bond market anchoring. Trade construction should adjust in kind.

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The National Australia Bank business survey for April 2025 shows a shift in business confidence from -4 to -1. Business conditions decreased slightly, moving from +3 to +2, which is notably below the long-term average.

Within the measured subcategories, the sales index remained stable at +5, and employment also held steady at +4. However, profitability saw a decline, dropping 4 points to -4, attributed to increased purchase costs affecting margins. The capital spending index experienced a 6-point decrease to +1, reflecting hesitation in new investments amid uncertainty over US trade policy.

Interest Rate Expectations

The Reserve Bank of Australia is expected to cut interest rates in its upcoming meeting on May 20. This potential rate cut may bolster sentiment in the business community.

Taken together, these numbers give us a snapshot of a private sector that is hesitating rather than retreating entirely. Confidence had been deeply negative, so the slight lift from -4 to -1 might seem minor at first glance, but traders should not overlook the timing—it comes just ahead of a likely rate move. Conditions, while still in positive territory, have lost some momentum, slipping to +2 and dipping under the historical norm, which raises questions about how sustainable current activity levels truly are.

Sales and employment holding firm suggests that day-to-day operations continue with some resilience. When revenue and staffing remain steady, it usually means short-term demand hasn’t deteriorated. However, it’s the profitability reading that draws the most attention. A fall into negative territory, especially driven by rising purchase costs, tells us that firms are facing growing margin pressure. They’re selling, they’re hiring, but they’re making less money doing it. That squeeze can’t go on too long without other parts of the business being affected.

What’s more, the sharp drop in capital expenditure—from a reasonably solid +7 down to +1—gives a clear message: companies are pulling back on future-facing commitments. That doesn’t come from nowhere. The report connects this cool-off in capex to trade policy uncertainty in the United States. When firms are unsure about external demand or the stability of international supply flows, they often park investment decisions. That now appears to be happening.

Market Sentiment and Derivatives

For those of us watching this from a derivatives angle, the likely RBA rate cut on May 20 has already started to shape sentiment. While the market has priced in the move to an extent, the impact on options pricing, especially near-term volatility on rates and currency products, could widen more rapidly if the central bank takes a cautious tone when delivering its guidance. The slight bump in business confidence appears to reflect an expectation that monetary easing will continue, but if that support fails to materially lift conditions or restore profitability margins, the next round of macro releases could act as stronger market catalysts.

One way to interpret the numbers is this: the domestic economy isn’t contracting, but it’s waiting. Waiting for clarity on global headwinds, waiting for cheaper borrowing costs to flow through—waiting, in short, for the next reason to act decisively. From our perspective, this kind of stall pattern can leave pricing susceptible to sudden revaluations, especially in short tenor instruments.

Track spreads between employment and profitability indices. When hiring remains constant but margins narrow significantly, something usually gives. Keep close to implied volatilities around that May 20 date—should forward-looking indicators start to hint at further margin contraction, implied rates could dislocate from currently assumed forward paths.

We are now in a situation where firms are doing just enough to maintain stability, with early signs that any external pressure could push them into retraction. Pay particular attention to sectors sensitive to overseas inputs or US-exposed export flows—additional news on tariffs or trade route shifts could bring abrupt shifts in equity-linked derivatives or sector-specific hedging behaviours.

Branch out from central bank forecasts. This report shows us that even with rate cuts, the problem may lie more in confidence and profits than in borrowing costs. That’s a shift worth modelling.

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