Global Stocks, US Futures Jump As Trade War Fears Recede, Commodities Spike

The "trade war on, trade war off" market is back.

One day after global markets tumbled, and commodities suffered the biggest one day drop in 4 years, the risk on mood is back after traders detected a subtle shift in China's rhetoric, which according to Bloomberg appeared to be toning its responses to Donald Trump’s tariff threats. Evidence of the shift continued Thursday when the Commerce Ministry held off detailing how it plans to retaliate against Trump’s latest threat to impose tariffs on $200 billion worth of Chinese-made goods.

Specifically, commerce Ministry spokesman Gao Feng said the government will take “necessary” steps to hit back, but when pressed he stopped short of repeating a previous pledge to respond with “quantitative” and “qualitative” measures and didn’t outline specifics about which measures China would retaliate with.

Perhaps China simply hasn't decided yet how to retaliate, or simply did not want to disclose it in public, but to observers, the modest change of tone suggests China could be playing for time with the aim of restarting stalled negotiations for a solution that would limit the need to unleash punitive retaliatory measures. To be sure, for President Xi Jinping, gathering problems at home and abroad may be prompting a less confrontational course. “China may be moving gradually from the current tit-for-tat mode of retaliation toward a controlled, selective retaliation,” said Chang Jian, chief China economist at Barclays Plc in Hong Kong.

Optimism was threatened when Gao Feng rejected an earlier report that Beijing was holding backdoor negotiations with the US and said that China is not in touch with the US right now for renewing trade talks, but that was largely ignored by markets who were desperate for any positive catalyst, and latched on to news of a possible de-escalation by Beijing with rabid desperation.

So, as a result of the glimmer of hope of trade war de-escalation, we are having a repeat of the Monday session and a mirror image of Wednesday, as stocks advanced globally, rebounding from yesterday's sharp selloff, while the dollar steadied while Treasuries edged lower and commodities recovered ground.

The risk on tone started in China where the Shanghai Composite surging 2.2%, recovering the 2800 level and testing the 20-day moving average, while the tech-heavy Chinext soared 3.3% to recover 1600. Chinese chipmakers and telecom companies surged after the US said it will remove the ban on Chinese telecom equipment maker ZTE.

 

A risk on mood sent the Yuan sharply higher, with the USDCNH sliding 0.5% to just below China's redline of 6.69.

 

Sentiment from Asian session carried through into European trading. U.S. equity futures joined the broad rally and were close to yesterday’s highs..

 

...  while European equity markets also rebounded sharply, with the Stoxx 600 rising 0.6%.

 

Still, not everyone was convinced: "There won’t be any winners from the trade war, and the risk is that it will have an impact on global growth, on consumer spending and will end up boosting inflation. All these elements are bad news for the equity market,” said Pictet sr. investment advisor Frederic Rollin, speaking in an interview on Wednesday.

Commodities are bouncing back strongly after yesterday's historic rout. Brent is advancing after yesterday's largest one-day drop in five years which was spurred on by trade concerns and increased Libyan production. WTI is up 0.8% and Brent up 1.8% but still well below the levels seen prior to yesterday’s trade, with WTI finding some support at its 100DMA, currently at USD 69.40. IEA maintain their forecast for 2018 global oil demand growth of 1.4mln BPD, say OPEC crude production in June reached a 4-month high of 31.87mln BPD, up 180k BPD (excl. Congo).

Meanwhile, in FX, Bloomberg notes that the low-volume summer trading in the spot market took over from Wednesday’s positioning adjustments, leaving the major currencies confined to relatively narrow ranges. Reports that the U.S. and China may look to resume trade talks helped keep the dollar firmly supported versus the yen following bullish technical breaks.  The USD/JPY rose to a fresh 6 month high, continuing to push higher; meanwhile, the SEK was weaker on CPIF miss. Emerging Markets were led higher by TRY as new treasury and finance minister - and Erdogan's son-in-law - said the central bank will be more “active” than ever.

In rates, USTs are close to overnight lows, curve marginally flatter; bunds briefly push higher on reports that Trump is considering pulling out of NATO, however, move is quickly faded after Trump announced that NATO had come to an agreement to boost spending.

Market Snapshot

  • S&P 500 futures up 0.5% to 2,789.00
  • STOXX Europe 600 up 0.2% to 382.25
  • MXAP up 0.09% to 164.21
  • MXAPJ up 0.4% to 536.58
  • Nikkei up 1.2% to 22,187.96
  • Topix up 0.5% to 1,709.68
  • Hang Seng Index up 0.6% to 28,480.83
  • Shanghai Composite up 2.2% to 2,837.66
  • Sensex up 1% to 36,611.07
  • Australia S&P/ASX 200 up 0.9% to 6,268.31
  • Kospi up 0.2% to 2,285.06
  • German 10Y yield unchanged at 0.368%
  • Euro up 0.1% to $1.1686
  • Italian 10Y yield rose 1.7 bps to 2.422%
  • Spanish 10Y yield rose 0.6 bps to 1.31%
  • Brent futures up 2.1% to $74.91/bbl
  • Gold spot up 0.2% to $1,244.73
  • U.S. Dollar Index little changed at 94.08

Top Overnight News

  • China Ministry of Commerce: U.S. is not in touch with China in regards to renewing trade talks
  • Bond traders are calling time on the Federal Reserve’s tightening cycle. The spread between December 2019 and December 2020 eurodollar contracts fell below zero Wednesday for the first time, suggesting short-end traders don’t expect the central bank to raise interest rates at all after next year. In fact, they’re giving slightly better odds that the Fed eases policy over the span instead of tightening it
  • NATO: reports from DPA that Trump threatened to pull U.S. out of NATO are later refuted by Reuters citing people familiar
  • BOE: 2Q defaults on unsecured lending driven by a significant increase in defaults on credit cards
  • Sweden Jun CPIF y/y: 2.2% vs 2.3% est; Riksbank minutes show concerns that moderate inflation raises questions about the development of inflation in the long run
  • IEA: OPEC’s Gulf members may need to pump almost as much crude as they can to cover supply losses from Iran and Venezuela
  • The U.K. seeks to strike new trade deals for services around the world as part of a Brexit plan that will tie its goods to European Union rules in a bid to preserve open customs borders with the bloc
  • In an unexpected twist, NATO leaders are holding an unplanned emergency session on the last day of their two-day summit, which has been upended by U.S. President Donald Trump’s attacks on allies over defense spending.
  • Traders will be watching to see what Chinese policymakers do to defend the yuan after it tumbled past a key level against the dollar. The yuan sank as much as 1.1 percent in overnight offshore trading to 6.7249, its biggest loss since January 2016, as a trade conflict with the U.S. worsened
  • The market probability of an Aug. 2 Bank of England rate hike stands at about 80 percent, near the levels seen in the run-up to May’s meeting when Carney intervened to damp expectations.
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