Summary
The biggest one-day rise by Chinese shares for two years and an increasingly market-friendly look to Brexit developments keeps risk appetite on track.
What trade war?
European shares take their turn to benefit from a virtuous circle of sentiment beginning with Friday’s benign payrolls data. China’s yuan and stock markets continued to stabilise from last month’s steep and fast slides with the help of further quiet financial intervention and reassuring monetary jawboning.
China Banking and Insurance Regulatory Commission reportedly told banks to 'significantly cut' rates for small firms in the third quarter and the latest in a stream of upbeat official comments included the Shanghai Stock Exchange noting “obvious value investment opportunities". This coincided with China’s foreign exchange reserve’s rising by an unexpected $1.51bn in June to $1.3112 trillion, compared to a $10bn drop widely expected. It was mostly on the back of a pause in the downtrend of Treasury prices last month. Still, the surprise resilience of China’s dollar holdings to a barrage of trade rhetoric and the symbolism of global shares shrugging off tariffs that came into effect was sufficient encouragement for Asian investors, particularly on the basis that pricing of trade concerns could have overshot.
The most obvious question now is how long Monday’s sentiment can hold. Should Washington go ahead with a threatened $450bn in counter-retaliatory new duties, markets are likely to be less sanguine. Treasury, gilt and bund yields showed signs of having found a floor. Of late, that has been a fair precursor of the next phase in the dollar’s upward grind. Should the greenback’s upticks against the yen broaden, we expect risk appetite to be pared back in the short term.
Brexit exits boost sterling
The upshot is a rising swell for European equities that also buoys Wall Street futures contracts. EU-UK news also plays a part with rises by both sterling and the single currency after the weekend’s ‘soft-Brexit’ news was topped by the exit of the Secretary of State for Exiting the European Union.
Markets had previously regarded the potential departure of one of the most senior pro-Brexit ministers with trepidation. In the event, sterling wobbled, but soon resumed the bid that followed Friday’s compromise customs agreement by the cabinet. David Davis’ exit came hours after another senior Leave proponent, Environment Secretary Michael Gove, suggested the plan was a realistic compromise.
That Germany’s DAX and Britain’s FTSE showed little of their typical wariness to currency advances again underlines the market’s welcome of weekend Brexit developments.
Shares, the euro and pound would be vulnerable if the UK government fractured further. Indeed, the blueprint of a "free trade area for goods" will face its severest tests in Brussels in coming weeks. Chief Negotiator Barnier said "We will assess proposals to see if they are workable and realistic".
China, Canada, UK releases in focus
It’s quiet for the remainder of Monday on the agenda for economic releases with broad market appeal so attention is shifting towards what will be a busy week for macroeconomics and U.S. corporate earnings releases.
China’s inflation snapshots will be in particularly sharp focus on Tuesday morning, followed by Britain’s factory and industrial data and the latest ZEW business sentiment readings from Germany.
The Bank of Canada is expected to go ahead with another 25-basis point interest rate rise on Thursday, though given that market expectations have largely baked the expectation in by now focus will largely be on accompanying commentary. Should the statement continue to project 'higher interest rates' referenced in May’s notes, Canadian dollar pricing will likely warrant further gains. In turn, this could keep trigger further broad pressure on the greenback.
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