Stocks, oil and dollar rise as trade war put 'on hold'

May 21, 2018

London (May 21)  Stocks, oil prices and the dollar were on the rise on Monday after the U.S.-China trade war was declared “on hold” while in Europe, Italy’s borrowing costs climbed and the Milan bourse retreated as two anti-establishment parties got closer to power.

The pan-European STOXX 600 was up 0.4 percent, hovering near 3-month highs, London's FTSE 100 .FTSE hit a new record and rose 0.9 percent and U.S. S&P mini futures ESc1 rose 0.6 percent following a positive session in Asia.

“There’s certainly a ‘feel-good’ sentiment on risky assets” due to the U.S. trade announcement, said Stephane Barbier de la Serre, a strategist at Makor Capital Markets.

U.S. Treasury Secretary Steven Mnuchin declared the U.S. trade war with China “on hold” following an agreement to drop their tariff threats that had roiled global markets this year.

Mnuchin and U.S. President Donald Trump’s top economic adviser, Larry Kudlow, said the agreement reached by Chinese and American negotiators on Saturday set up a framework for addressing trade imbalances in the future.

Barbier de la Serre cautioned, however, that given the lack of details available about the agreement between the U.S. and China, it was too early to call it a definitive turning point.

He added that a number of question marks, such as on the prospects for world growth, inflation and rising rates, should also keep investors on their toes.

As safe-haven demand for debt fell, U.S. bond prices were under pressure, keeping their yields not far from last week’s peaks with the 10-year Treasuries yield at 3.072 percent, US10YT=RR near a seven-year high of 3.128 percent hit on Friday.

In the currency market, higher U.S. yields helped to strengthen the dollar about 0.30 percent against a basket of currencies while the euro dipped 0.25 percent to $1.1746 EUR=.

The common currency was also under pressure as Italy's far-right League and the 5-Star Movement agreed on a candidate to lead their planned coalition government and implement spending plans which some investors believe threaten the sustainability of the country's debt pile.

“It is something that creates a lot of nervousness, but of course on the other hand one has to wait”, ECB governing council member Ewald Nowotny said on Monday morning.

The Milan bourse started the day sharply lower but progressively claimed back losses and limited its fall to 0.3 percent.

Italy’s 10-year bond yield nearly rose to three percent in early morning, their highest level since July 2017 but also eased back to about 2.26 percent.

Oil prices held firm near 3-1/2-year highs also on easing trade tensions. Brent crude futures LCOc1 were at $78.97 per barrel, up 0.6 percent.

The market is also keeping an eye on Venezuela, where President Nicolas Maduro faces fresh international censure after his re-election in a vote foes denounced as a farce, cementing autocracy in the crisis-stricken OPEC nation.

Oil prices have been supported by plummeting Venezuelan production, in addition to a solid global demand and supply concerns stemming from tensions in the Middle East.

The “risk on” sentiment on the market also spurred gains copper prices with the exception of aluminium, which was pressured by more than 100,000 tonnes of inflow last week.


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