CHINA-JAPAN: Trade Group To Visit Beijing, But Security Tensions Dominate Ties

• The German curve has bear flattened again, with Schatz yields up 5bps amid fresh hawkish repricing in ECB rate hike expectations. ECB-dated OIS now fully price a 25bp hike in April, with no signs of de-escalation between the US and Iran over the weekend.
• 10-year yields are up just 1bp, with 15-30-year tenors little changed. Long-end bond markets may be starting to factor in the negative growth impact of the energy price shock and likely ECB rate hikes.
• The 10s30s EUR swap curve is now at negative -2.3bps (-4.4bps today). Unwind of Dutch pension fund transition positioning has played a role in the significant flattening seen since the Iran war started.
• The 10-year BTP/Bund spread is looking to test 100bps for the first time since H1 2025, with fresh hawkish ECB repricing, weak equity sentiment and increased rates volatility continuing to drive widening.
• The EU and Belgium will sell bonds this morning. Meanwhile, the latest ECB wage tracker update has come too soon to reflect Iran war impacts. Focus remains on tomorrow’s March flash PMIs.
• Bund futures are -29 ticks at 124.97, off session lows of 124.80. A bear cycle remains intact and Friday’s impulsive sell-off reinforces current conditions. Sights are on 124.56, a Fibonacci projection point.

Reuters reports comments from PM Sir Keir Starmer regarding the war in Iran and the impact on the British economy. Says that "We will discuss every lever there is" on cost-of-living issues due to the war. Says that the "Number one priority is to protect British interests". Starmer: "There is no assessment that we are being targeted by Iran." Repeats calls for de-escalation and says that the Strait of Hormuz "needs careful consideration and [a] viable plan". 

• The PM appears before the House of Commons Liaison Committee, the seniormost in the Commons, formed of the chairs of other select committees, today at 14:30GMT (10:30ET, 15:30CET). Livestream here.
• These sessions usually have three main topics of questioning for the PM (for example, the economy, healthcare, immigration), but today's session is likely to be dominated by foreign/defence policy in relation to the situation in the Middle East and the economic fallout that UK households and businesses, and indeed the gov't itself, will face.
• Starmer's comment regarding the threat of the UK being targeted by Iran comes after Israel claimed over the weekend that Iran had missiles that could target European capitals. Comes after Iran targeted the UK-US base of Diego Garcia on the Chagos archipelago in the Indian Ocean. Secretary of State for Housing, Communities and Local Gov't Steve Reed said to the BBC that there is "no specific assessment that the Iranians are targeting the UK - or even could if they wanted to". 

• Risk aversion has continued across financial markets to start the week, as the US and Iran traded threats around the conflict and US President Trump giving Iran a two-day ultimatum to open the Strait of Hormuz. While oil prices are moderately higher Monday, souring risk sentiment is more evident in lower equity benchmarks and a notably unwind for precious metals which have pushed to fresh lows for 2026.
• All of the above are contributing to a firmer US dollar, helping the DXY extend its recovery from 20-day EMA support, which held last Thursday. The index remains around 70 pips shy of recovery highs and the key resistance cluster at 100.50.
• Antipodean FX has been bearing the brunt on Monday, with AUDUSD notably trading down to the lower bound of the March range at 0.6950. Today’s AUDUSD price action has seen the pair dip below the 50-day EMA for the first time since November. A clear break of it would undermine the bull theme and signal scope for a deeper retracement. This would open 0.6897, the Feb 6 low.
• For NZDUSD, spot is back below 0.5800, where the pair has consistently found support in recent sessions. A break of 0.5774 would place the pair at a two-month low.
• EURUSD has declined 0.5% today and is edging back towards 1.15. Last Thursday’s rally in amid the hawkish ECB repricing still appears corrective - for now – with technicals pointing to a dominant medium-term downtrend. Short-term parameters appear well defined at 1.1410-1.1610.
• USDJPY narrows the gap to the 159.90 cycle highs, an impressive rebound following last week’s post-BOJ selloff. A break above would mean the highest levels since mid-2024 with the Jul 8 ‘24 standing at 160.26. Intervention risks may linger; Japanese spring wage negotiations saw hikes above 5% for the third consecutive year.
• Fed's Miran, ECB's Cipollone and Lane as well as RBNZ's Breman are scheduled to speak. In terms of data, we will see US construction spending and Japan CPI but the main focus lies on further developments around the Iran conflict.