Tuesday 21:00 BST
What you need to know
● S&P 500 steadies as energy stocks get lift from oil price rally
● Bunds outperform as 10-year Treasury yield bounces off five-week low
● South African rand hits weakest point in three months after downgrade
● Dollar puts in mixed performance
● Gold edges ahead
German Bunds outperformed US and UK government bonds on Tuesday as nerves set in ahead of the second French Presidential debate, due to take place later in the day.
“This debate is key as some candidates have said that they won’t attend the final debate on April 20, as it is too close to the election,” noted Kathleen Brooks, research director at City Index.
She highlighted that while centrist independent Emmanuel Macron and the far-right leader Marine Le Pen were favourites to make it into the second round of voting, it would be premature to rule out a place for François Fillon, the centre-right candidate whose campaign was derailed by scandal.
“We expect Mr Fillon to give his all in the debate, and he is likely to come out fighting as this is his last chance to use a public debate to boost his popularity,” Ms Brooks said.
The yield on the 10-year German Bund — which moves inversely to its price — fell 3 basis points to 0.25 per cent, while the spread between French and German two-year yields widened to the highest level since the eurozone crisis in 2012.
By contrast, the yield on the 10-year UK gilt ended unchanged at 1.06 per cent, while that on the 10-year US Treasury bounced off a five-week low of 2.31 per cent to trade 1bp higher at 2.36 per cent.
The benchmark US yield has slid from a 2017 high of 2.63 per cent, hit just before the Federal Reserve raised interest rates last month, as doubts about the strength of the economy heightened uncertainty about the potential pace of future increases in borrowing costs.
Notably, disappointing data on new US car sales released on Monday fuelled concerns about the market have been enthusiastic upbeat about the health of consumer spending.
“The unexpected dip in March auto sales is the latest hard data release to suggest that the Trump reflation trade may have run its course,” said Steven Ricchiuto, economist at Mizuho USA.
US data released on Tuesday painted a slightly rosier picture, however.
“The US reports revealed stronger than expected trade deficit data and factory goods figures that closely tracked assumptions, leaving a net boost to our first-quarter GDP growth estimate to 1.5 per cent from 1.2 per cent, after fourth-quarter growth of 2.1 per cent,” said Mike Englund at Action Economics.
US stocks, however, remained defensive as lingering concerns about the prospects for the “Trump trade” — for now at least — underpinned another mild bout of risk aversion.
Wall Street’s renewed caution — ahead of a summit later this week between US President Donald Trump and Xi Jinping, his Chinese counterpart — came in spite of a strong rally for oil prices that pushed Brent crude towards a four-week high.
The S&P 500 closed less than 0.1 per cent higher 2,360 after spending the day in a narrow 10-point range.
That left the benchmark equity index about 1.5 per cent below the record closing high set at the start of March.
In Europe, the Stoxx 600 index clawed back some of Monday’s decline as it rose 0.2 per cent while a 0.3 per cent dip for sterling against the dollar to $1.2442 helped the UK’s FTSE 100 outperform with a gain of 0.5 per cent.
Activity in Asia was curtailed by holidays for markets in China, Hong Kong and Taiwan, leaving Tokyo to take the brunt of the selling, with the Topix index off 0.8 per cent in the face of a stronger yen.
In Sydney, the S&P/ASX 200 index fell 0.3 per cent, although materials stocks found support after Australia recorded its second-highest nominal trade surplus on record for February, bolstered by strong commodity prices.
Energy was the top-performing equity sector in the US and Europe too, as Brent oil settled at $54.17 a barrel , up 2 per cent on the day and the highest in nearly four weeks.
Harry Tchilinguirian, strategist at BNP Paribas, said the next Opec meeting in May would be a pivotal point for the oil market.
“Whether Opec will extend its period of supply restraint beyond the initially agreed six-month period is the key issue,” he said.
“We assume that an extension of production restraint will be agreed — albeit with weaker levels of compliance in the next six-month period. This action will lend support to oil prices but this will also encourage US shale output.”
Copper touched a one-week low before rallying to end 0.4 per cent higher in London at $5,778 a tonne.
Gold edged up $3 to $1,256 an ounce in spite of a mixed showing from the dollar.
Focus in the currency markets was directed at the South African rand, which at one stage on Tuesday was 1.9 per cent weaker at 13.9434 per dollar — in line for its worst close of the year.
Since hitting a 20-month high on March 27, the rand had plunged more than 13 per cent after President Jacob Zuma fired a finance minister that was well-respected by investors and triggered a rating downgrade for the country’s credit.
The South African 10-year bond yield early on Tuesday jumped to a four-month high of 9.18 per cent as traders took fright.
However, the rand rallied to stand now 0.7 per cent firmer on the day at 13.61 after Mr Zuma stressed he may have changed the finance minister but his government’s policies remain the same. Bond yields eased back to 8.93 per cent.
The euro was flat against the dollar at $1.0667 but the US currency was 0.1 per cent lower versus the yen at ¥110.73.
“The yen has been a notable outperformer in G10 FX over the past month, rallying close to 3 per cent against the dollar,” noted analysts at TD Securities.
“This reflects a mix of drivers like year-end flow rebalancing in Japan, the narrowing of basis swaps — boosting demand for hedging activity — and broader risk aversion.”
The Australian dollar was down 0.5 per cent to US $0.7565 after the central bank left interest rates unchanged as expected but backed steps to crackdown on risky home loans.
Additional reporting by Hudson Lockett in Hong Kong
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