US Stocks Gain, Yields Rise as Risk Appetite Returns Despite Trade War Salvos

September 19, 2018

Frankfurt (Sept 19)  Global stocks extended gains Wednesday, with markets in Asia following on from last night's rally on Wall Street, as investors cheered a smaller-than-expected reaction from both the U.S. and China in their ongoing trade war in what could be a signal that the world's two biggest economies may be prepared to broker an agreement.

China's decision to retaliate with tariffs of 5% on $60 billion worth of U.S. imports, following President Donald Trump's move to add levies of 10% on $200 worth of goods coming the other way, both fell short of investor expectations and, if manged by the two sides correctly, shouldn't have a significant impact on economic growth or corporate profitability.

In fact, despite listing a global trade war as the most concerning tail risk in the market at present, Bank of America Merrill Lynch's benchmark fund manager's survey, which polled 244 investment managers who run more than $742 billion worth of assets, noted that U.S. equities remain the global markets most-favored destination, in large part because corporate profits -- which are expected to grow by more than 20% for a third consecutive quarter -- have remained so strong.

Last night's rally on Wall Street, which saw the tech-focused Nasdaq Composite  rise 61 points, or 0.78%, while the Dow Jones Industrial Average  and the S&P 500  gain 0.7% and 0.55% respectively, flowed into the Asia session as investors added risk, and dumped U.S. Treasuries, in the wake of Tuesday's trade-dominated headlines.

The moves lifted the MSCI Asia ex-Japan index 0.99% heading into the final hours of trading, while a stronger U.S. dollar pushed the yen to a multi-week low of 112.39 and helped boost the Nikkei 225 1.08% higher for a closing level of 23,672.52 points.

Reaction in China's state-run media was also relatively tepid, with editorials in the People's Daily and the China Daily both focusing on the nation's resilience in the face of adversity and the need to adopt domestic policy changes in order to offset the tariff impact, a suggesting that could be read as a tacit admission that its export-led growth model needs to be adjusted by Beijing.

Stocks in China ended the session with their second consecutive gains, with the Shanghai Composite rising 1.1% and the CSI 300 jumping 1.3%.

U.S. stock futures, meanwhile, were indicating solid, although not spectacular, opening bell gains, with contacts tied to the Dow suggesting a 32-point advance while those liked to the S&P 500 pushed 0.64 points into the green.

European markets were also firmer at the start of trading, with basic resource stocks leading the gains, as the Stoxx 600 index rose 0.3% to a two-week high of 379.82 points before paring that advance t0 0.1% as benchmarks around the region posted similar percentage gains as a stronger single currency, which traded at 1.1711 against the greenback, held down the advance.

Currency movements also triggered some notable volatility for the FTSE 100, which fell as much as 0.22% in the opening two hours of trading in London, as the pound hit a nine week high of 1.3215 after a faster-than-expected reading of 2.7% for August inflation that could spur bets on new rate hikes from the Bank of England.

The benchmark reversed that decline, however, and rose by 0.27% as the pound slumped to 1.3100 amid reports that Prime Minister Theresa May would reject an improved offer to solve the Norther Irish border dispute that has held up Brexit negotiations ahead of a meeting with 27 EU leaders in Austria later today.

Benchmark 10-year U.S. Treasury bond yields hit a four-month high of 3.07% in overnight trading, while 2-year notes changed hands at a decade high of 2.816%, as investors both favored riskier markets and adjusted fixed income portfolios for faster inflation, which could be triggered by the application of import tariffs that will filter-through to consumer prices in the back end of the year.

One lingering concern for the bond market, however, could be the fact that Treasury data should China's holdings of U.S. government debt fell to $1.171 trillion in July, a seven month low, even as its trade surplus continued to expand and now sits at a year-to-August record of $192.63 billion.

Global oil markets were also active, with investors tweaking prices higher ahead of this Sunday's meeting of OPEC member states, as well as Russia, in Algeria that is likely to focus on the impact of the November sanctions on the sale of Iranian crude, which have already taken 580,000 barrels from the market as customers seek supply elsewhere.

Brent crude contracts for November delivery, the global benchmark, were seen 13 cents higher than their Tuesday close in New York and changing hands at just over $79.20 a barrel, while WTI contracts of the same month were marked 21 cents higher at $69.80 per barrel.


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