Markets win as China US spat on hold

Summary

Risk appetite got a shot in the arm after U.S. Treasury Secretary Mnuchin pronounced the trade dispute with China to be “on hold”.

Win-Win

A “win-win” for U.S.-China trade relations, as described by Xinhua, is a small victory for global stock markets. The news set a firm floor for U.S. index futures and European shares. On the other hand, U.S. Treasury yields were off last week’s levels by just negligible amounts, so the first test of improved risk appetite in many big stock markets was whether investors believed shares had sufficient momentum for a definitive advance. One market that had already passed this test on Monday was the FTSE 100, which set a string of new record highs. It came on a combination of the boost for large overseas exporters and operators from reduced Sino-U.S. trade tensions and the pound accelerating below its two-week range in step with a new five-month dollar high. Sterling saw added pressure from chatter over a potential snap UK general election though a typically delicate balance on the Prime Minister’s compromise customs proposals also weighed. Sterling sentiment appeared to be pessimistic enough to negatively prejudge Wednesday’s inflation data given that the update will settle the argument over whether the Bank of England raises rates again this year or not.

Italian yields less relaxed

Resurgent Italian benchmark yields that pushed the gap between Spain’s to the widest since 2012 were among the dislocations that prevented European stock markets from fully participating in Monday’s stock advance. Whit Monday holidays also kept a raft of observant markets like Germany’s DAX and France’s CAC 40 closed. The broad STOXX gauge was lifted by the remainder, including a 3% rally in Ryanair shares that reversed an earlier slump. After record full-year profits, investors were inclined to discount pessimistic commentary as more conservative than definitive. Italy’s FTSE MIB was again the chief drag in Europe, albeit some of its negative trading was due to a spate of dividend payments. Still, Italian sovereign yields were on the March again, taking the gap between Spain’s to the highest since 2012. Yields on Italy’s 5-year CDS, an asset for insuring debt, also leapt. Investors were eyeing a meeting between the newly coalesced 5-Star and Northern League parties and Italy’s caretaker president later on Monday. The coalition said it had chosen a “balanced” candidate to be PM and would reveal the person after the meeting. Their platform of ramped spending and tax cuts was supported by 90% of some 200,00 voters polled by the coalition. Clarity over how much of the agenda will filter through the parliamentary process will take time to achieve. Meanwhile, Italian yields will almost certainly remain elevated, suggesting FTSE MIB declines had only paused on Monday.

Euro defended

In turn, the euro’s slightly less heavy tone at the time of writing may also turn out to be a pause. Pressure on the single currency was split between Italy and the soaring dollar, but the balance was less clear. The greenback barely hesitated after 10-year Treasury yields retreated from last week’s 3.1280% peak whilst Germany’s first quarter growth was revised lower on Monday. It was notable that the euro managed to hold above $1.1716. The shared currency marked a spate of lows near there between 20^th November and 18^th December before a momentous rally to new three-year highs in January, February and April. Should the level remain defended, the chance of a sizeable reversal to the upside will increase. Markit’s business sentiment gauges for the Eurozone coming on Wednesday could be influential. Forecasters expect PMI indices for the bloc’s service and manufacturing sectors to tick only slightly lower. In other words, there is room for an unexpected, albeit modest positive surprise.