Europe cheers super-sized stimulus plan, U.S.-China tensions simmer
LONDON (May 28) - European shares rose for a fourth straight session on Thursday and the euro perched at a two-month high, as businesses returning to work and a 750 billion euro EU stimulus plan outweighed rising U.S.-China tensions.
Asian markets were subdued overnight after U.S. Secretary of State Mike Pompeo warned Hong Kong no longer warranted special treatment under U.S. law, but there was no stopping Europe.
Traders diving back into the markets after Wednesday’s EU plan to prop up the bloc’s coronavirus-hit economies pushed the region-wide STOXX 600 index up more than 1% to a fresh 11-week high, led by a 2% jump in travel & leisure stocks.
The euro enjoyed the view at $1.1006, having risen to a two-month high. It also held at the near three-month high hit versus the neighbouring Swiss franc the previous day, while the dollar was largely quiet. [/FRX]
Euro zone bond yields were relatively stable too, with Italian borrowing costs - a key European confidence indicator - edging towards new eight-week lows. Safe-haven German bonds sold off slightly.
“With the release now of the European Commission’s plan for COVID recovery, we see there being room for further positivity in Eurozone risk assets, even while the global sentiment is buffeted by China-related tensions,” Mizuho analysts told clients.
“This feeds directly into our expectations for European risk assets to outperform, which will be further helped by a likely expansion of ECB QE next week.”
Overnight, MSCI’s broadest index of Asia-Pacific shares outside Japan ended flat, having been in positive territory earlier in the day.
Shares in Hong Kong skidded as much 1.75% before ending down 0.7% as Chinese shares managed to close in positive territory [.SS]. Japan’s Nikkei jumped 2.3% though U.S. stock futures lost momentum in Europe to trade only 0.2% higher. [.N][.T]
The biggest risk to equities now looks to be the Sino-U.S. relationship, which is likely to worsen after Pompeo said on Wednesday that China’s plan to impose new security laws in Hong Kong was “only the latest in a series of actions that fundamentally undermine” the city’s autonomy.
“All eyes remain on the U.S.-China relationship,” said Chris Weston, the head of research at Pepperstone, a currency broker. “This is a risk for markets... One questions if the equity markets are too complacent here.”
A punitive U.S. response to China on the issue of Hong Kong could result in a tit-for-tat reaction from Beijing, further straining ties between the world’s two biggest economies and hobbling global growth.
President Donald Trump has said he will announce a response to China’s policies towards Hong Kong later this week.
Yields on 10-year U.S. Treasuries fell slightly to 0.6786%. Although they are up from an all-time low of 0.4980% struck in March, they are still a whopping 120 basis points below highs seen in January.
China’s yuan meanwhile gained around 0.1%, edging away from its record low of 7.1699 per dollar in international markets. In ‘onshore’ trade too, it was still close to its weakest since the height of the U.S.-China trade war last September.
Commodity markets groaned. U.S. crude futures fell to as low as $31.14 a barrel, before recovering slightly, and were last at $32.51. Brent crude was at $34.52, down 0.6% on the day, as investors fretted about Trump’s response to China.
Saudi Arabia and some other OPEC oil producers are considering extending record high output cuts until the end of 2020 but have yet to win support from Russia, according to OPEC+ and Russian industry sources.
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