- Asian shares close lower but U.S. futures rebound strongly
- Trump may have shown his first crack under re-election pressure, increasing chances for a speedy trade resolution
Key Events
Though Asian markets and U.S. futures opened the trading week this morning deep in the red, futures—including for the S&P, Dow and NASDAQ—have reversed higher and European stocks are trading off their lows after President Donald Trump said, at the G7 summit today, that "China called last night" and wants to restart trade talks. This was confirmed by a Caixin report saying lead negotiator Vice Premier Liu He is prepared to resume "calm negotiations," suggesting the U.S. president has behaved otherwise.
Safe haven assets trimmed gains or reversed lower including yields on the U.S. 10-year Treasury note slipped to 1.449 at time of writing, the lowest since July 2016.
Global Financial Affairs
Will a path to resolving the U.S.-Sino trade spat finally emerge this time? Or is this just be another round in the mercurial saga, plaguing markets with untamed volatility at every turn?
When Trump earlier abruptly ended the longest round of talks thus far, we posited that his strategy was to get a bear market out of the way, so that he could approach reelection with a fresh bull market in tow. However, that appears not to have been the case—the same old dance appears to be resuming.
Another theory, from William Reinsch, a trade expert from Center for Strategic and International Studies, as reported by CNBC says these hostilities could continue till just before the U.S.'s 2020 elections. Notes Reinsch, “[Trump] needs a victory but he needs it a year from now — he doesn’t need it now.”
Of course, with his base suffering from China's decreasing demand for U.S. agriculture, and his apparent vacillation over the weekend sounding like the first regrets regarding his trade war path, Trump might be cracking under pressure. After all, there's still quite a distance to go until 2020 elections. Though we've been cautiously bearish, we do recognize that this Administration could flip its policy and with it the path to higher tariffs, boosting stocks to fresh record highs in the medium-term.
However, we remain concerned about the longer term. This late in the business cycle, amid a record expansion following QE, sustainable economic growth isn't necessarily possible.
The STOXX Europe 600 Index pared some of the losses from technology and energy firm shares.
During the Asian session, benchmarks were red across the digital board. Japan’s Nikkei 225 dropped as much as 2.6% and closed with a 2.17% loss, its lowest level since Jan. 10, completing a H&S top since February—led by China related stocks. Hong Kong’s Hang Seng slipped 1.91% as antigovernment riots returned to the city after a week of more passive protest. China has increased pressure, threatened intervention and arrested dozens, including a 12-year-old boy.
On Friday, a moderate Fed was overshadowed by Trump's trade war rhetoric; U.S. stocks plunged, with each of the four major indices falling more than 2% and the NASDAQ closing 3% lower. The S&P 500 confirmed our bearish interpretation.
10-year yields returned to below 1.5%. Yields provided a downside breakout to a bearish flag, suggesting another leg down—also providing an omen for equities. It is noteworthy that while other havens trimmed gains or even switched to losses after Trump’s announcement of the Chinese call and willingness to resume talks, yields remain at their lows for the day.
The dollar rose, boosted by the good news on trade. However, it weakened relative to the yen.
Oil rebounded on the improved outlook for demand, following China’s willingness to resume talks.
Up Ahead
- The U.S. will release Core Durable Goods Orders at 8:30 EDT; For July they're expected to remain flat at 0.1%.
- This evening, China releases Industrial Profits, which have been plunging: -.310% YoY and -2.4% MoM in the last read.
Market Moves
Stocks
- Europe’s Stoxx 50 fell 0.1% before recovering higher.
- Futures on the S&P 500 Index climbed 0.5%.
- Hong Kong’s Hang Seng Index sank 1.91%.
- The Shanghai Composite slipped almost -1.2%.
Currencies
- The Dollar Index rose 0.3% to 97.93.
- The euro fell 0.2% to $1.1127.
- The British pound was little changed at $1.2271.
- Fourteen of 24 emerging-market currencies tracked by Bloomberg weakened.
Bonds
- The yield on 10-year Treasuries decreased nine basis points to 1.45%, today's lowpoint so far.
- The yield on 2-year Treasuries dipped eight basis points to 1.523%.
- Germany’s 10-year yield rose less than one basis point to -0.67%.
- Britain’s 10-year yield declined four basis points to 0.481%.
- Australia’s 10-year yield decreased nine basis points to 0.889%.
Commodities
- Gold climbed 0.3% to $1,542.09 an ounce.
- Iron ore dipped 4.5% to $83.30 per metric ton.
- West Texas Intermediate crude fell 0.3% to $54.03 a barrel.