Summary
Market participants have learned by now to take what is emitted from the @realDonaldTrump Twitter account with a few ounces of salt. Still, when the U.S. president expresses harmonic sentiment, stock markets do too.
Trump's Sunday night tweet saying he would do what he could to get ZTE (HK:0763), the sanctioned Chinese telecom equipment maker, 'back into business fast', may be inexplicable. His explanation as to why he reacted to the group signalling it could go out of business —'too many jobs in China lost'—may be puzzling, considering just about everything he has said about the impact of China's trade policy on U.S. jobs.
The comment certainly puts U.S. Commerce Department negotiators on the back foot. And the President may well change his mind shortly. But taken as a hint that the U.S.-China trade dispute might turn out better than markets fear, the news was a small positive, helping underpin sentiment. U.S. stock market futures kept their positive tone after risk aversion began to fade towards the end of last week. A second round of talk between U.S. and Chinese officials is scheduled this week. Investors have shown scepticism that these discussions will amount to much, but slightly improved chances were worth a modest uptick.
Asian Markets
Asian markets rose to the edge of two-month highs at one point, looking at the MSCI Asia Pacific Index ex-Japan, up 0.4%, and Nikkei’s 0.5% rise. Malaysia’s markets fell sharply as the ringgit slumped again on the shock return to power of controversial former PM Mahathir Mohamad on populist, fiscally demanding platform. Still, investor disquiet remained contained to Malaysian assets, with geopolitics continuing to calm in the other recent potential flashpoint, the Korean peninsula.
Ahead of U.S.-Korea talks beginning 12th June, the North repeated a pledge to dismantle nuclear facilities in front of international journalists. At best, since moves like these are just a starting point to a rapprochement that may or may not last, so long as progress continues, the read for investors should be slightly beneficial.
Oil Prices
Backing for the notion that resumed stock market buying interest was well grounded was that oil prices were still slipping off near four-year highs. Brent crude oil futures traded down $2 dollars on the day at $76.92 having peaked at $78 last week. Oil shares were under moderate pressure. Supply issues are back in focus as the U.S. shale industry continues to add rigs. Additionally, European and Asian signatories to the initial deal that removed sanctions on Iran have kept dialogue going with Iran and the U.S., making it clear they seek to protect the interests of their E&P firms in Iran. CFTC data showing oil bulls recently took profits together with U.S. oil price cycle highs are set to keep prices away from new peaks for the time being.
Europe, FX
Investors, particularly in Europe, kept eyes on the dollar, alert to any sign that a recent softening was just a pause. The Dollar Index was set to ease for fourth day in a row after a four-month top last Wednesday. The pound against the dollar was showing signs of having based near its 200-day moving average around $1.3550, giving a reason for UK stock market advances to become more tentative. A flattening U.S.2-Year/10-Year Treasury yield curve and tightening spreads versus benchmark German bund yields were coinciding with a similar pattern in the euro, That set the DAX up for another day’s decline.
A reduction of alarming developments in Italy also had a mixed-to-minor impact on major European stock markets. The anti-establishment 5 Star and anti-immigration Northern League parties said on Sunday they had reached an agreement to form a government, though 5 Star’s leader Luigi de Maio called for 'a bit more time' to come up with ministers and a PM. The idea of a ‘neutral’ (but still “political”) PM is still ‘live’. Neither de Maio or the League’s Matteo Salvini are willing to allow the other to lead a coalition. Prospects of a compromise PM help explain why, after an initial rise in risk aversion in Italian markets, investors’ attitude became more sanguine, despite prospects of a steep rise in Italy’s budget deficit from 5 Star/League policies that would jettison fiscal restrictions. Italy’s administrative President, Sergio Mattarella has asserted his right to reject a PM candidate and reminded both parties of the need to run sound finances and maintain a pro-European stance. Investors therefore had more reason to expect the market-neutral compromise government that has become almost customary in Italy to re-emerge.
Economic Calendar
In a quieter macroeconomic agenda than seen over the last two weeks, the eye is drawn to Tuesday’s UK jobs data. Three-month weekly wage growth is forecast to fall to 2.6% year-on-year from 2.8%. If seen, that would probably set the pound off on its a second round of marked weakness after it recently appeared to firm up from a three-week long down leg. Japan Machinery orders, eurozone (and particularly) Germany’s CPI on Wednesday, and Canadian inflation data on Friday will be the other ‘hot’ releases for markets this week.
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