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U.S. Markets

Trade deal hopes, upbeat Lagarde lift euro zone bond yields

(Reuters) - Euro zone bond yields rose sharply on Thursday after the United States and China appeared close to a trade deal and the European Central Bank’s new president Christine Lagarde said the bloc was headed for a slow and steady economic recovery next year.

FILE PHOTO: European Central Bank (ECB) President Christine Lagarde speaks before she gives a sign which will be implemented on the newly printed euro banknotes at the bank's headquarters in Frankfurt, Germany November 27, 2019. REUTERS/Ralph Orlowski//File Photo

U.S. President Donald Trump on Thursday said on the United States was “very close” to nailing down a trade deal with China. “Getting VERY close to a BIG DEAL with China,” Trump posted on Twitter. “They want it, and so do we.”

U.S. negotiators have offered to cut existing tariffs on $360 billion in Chinese goods by as much as 50%, and suspend tariffs due to go into effect on Dec. 15, the Wall Street Journal reported.

The trade news came in after ECB chief Lagarde said that risks to the economy had somewhat eased in her press conference leading the bank.

Germany's 10-year bund yield was last up 6 basis points at -0.26%, its highest level in over a week DE10YT=RR after touching a one-week low at -0.34% when Lagarde initially said the outlook for inflation remained subdued.

Italy’s 10-year bond yield rose 2 bps - increasing for the first time in a week - after Prime Minister Giuseppe Conte saying Italy would not agree a reform of the euro zone’s bailout fund unless it was part of a broader package. Prior to the ECB meeting it had hit two-week lows around 1.27%.

The big rise in yields is linked to the tariff cuts, said Natixis strategist Jean-Christophe Machado. But he added that the market was showing a big reaction on a rumor, adding: “we will wait for some real agreement before being too optimistic on our side.”

The trade news came in after Lagarde said that geopolitics, protectionism and vulnerabilities in emerging markets had skewed risks to the downside, but those risks were less pronounced than before.

While this kicked off the rise in bond yields on Thursday, “really there’s not a great deal to be interpreted from what she said, with the latest economic forecasts little changed,” said Chris Scicluna, Daiwa Capital Markets’ head of economic research.

(GRAPHIC: Markets react to new ECB chief - )

Lagarde said that the ECB expects to begin in January a strategic review of how it does business and to conclude it by the end of 2020.

She added that there was “no pre-conceived landing zone” for the review, which analysts say will set the tone for monetary policy in the years ahead.

Analysts said that Lagarde stressed the need to find consensus on a board deeply split by the September decision to resume asset purchases.

“I think the market is taking the fact that she’s noncommittal on policy as a shift towards the hawks - at least the hawks won’t be as suppressed under Lagarde as they were under (former chief Mario) Draghi,” said Antoine Bouvet, senior rates strategist at ING. “This explains the selloff we’re getting in Bunds now.”

“So the reaction from the ECB could be understood a little bit more hawkish by the market,” he added.

Reporting by Dhara Ranasinghe and Yoruk Bahceli; editing by Larry King and Lisa Shumaker

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