LONDON (Reuters) – Risk appetite returned to world markets on Thursday following a media report the United States and China have tentatively agreed to a truce ahead of a highly-anticipated weekend meeting of the two nations’ leaders in Tokyo.
FILE PHOTO: An attendent cleans the carpet next to U.S. and Chinese national flags before a news conference for the 6th round of U.S.-China Strategic and Economic Dialogue at the Great Hall of the People in Beijing, July 10, 2014. REUTERS/Jason Lee/File Photo
The South China Morning Post (SCMP), citing sources, said Washington and Beijing were laying out an agreement that would help avert the next round of tariffs on an additional $300 billion of Chinese imports.
On Wednesday, U.S. President Donald Trump said a trade deal with his Chinese counterpart Xi Jinping was possible this weekend, though he was prepared to impose tariffs on virtually all remaining Chinese imports if talks fail.
“But the truce cake seems to have been baked,” the SCMP cited one of its sources as saying.
Hopes that the world’s two biggest economies would finally reach an agreement were enough to cheer investors, sending MSCI’s broadest index of world shares up over 0.2% .MIWD00000PUS after four days of back-to-back losses.
Germany’s trade-sensitive DAX .GDAXI led Europe’s early gains with a 0.7% jump with the other main bourses and Wall Street futures all up between 0.2%-0.6%.
“The market is focusing on the hope that there will be a trade truce (between the U.S. and China),” said ING’s chief EMEA FX and rates strategist Petr Krpata.
“We still think though that it would be temporary and that things will get worse again over the summer before they get better.”
The trade row has already rattled investors who have ditched shares for the safety of bonds and gold this year. It has also prompted the U.S. Federal Reserve to shift 180 degrees from raising interest rates in December to now signaling a cut as soon as next month.
Many traders were still circumspect and expected the market to remain in a narrow range until after the weekend meeting of G20 leaders in Osaka, Japan, where Trump is also holding bilateral talks with other nations.
“Focus continues to be on the G20 meeting with a story in the SCMP…lifting the entire market, although the details suggest nothing has actually been agreed yet,” JPMorgan said in a note.
“Overall it seems more likely that tariffs are hiked than not, following the meeting, though the timing of this may be confused by a desire for positive optics.”
LESS THAN 50
Trump weighed into U.S. monetary policy on Wednesday, accusing Fed Chairman Jerome Powell of doing a “bad job” and “out to prove how tough he is” by not cutting interest rates.
Markets are convinced the Fed will indeed ease at its next meeting in July, but had to scale back bets on a half-point cut following cautious comments from various policy makers.
Futures FEDWATCH are 100% priced for a cut of 25 basis points next month, and imply a 22% chance of 50 basis points.
The probability of a less aggressive Fed and expectations of a Sino-China trade truce helped ease the selling pressure on the U.S. dollar, which rose 0.1% to 96.300 .DXY on a basket of currencies from a three-month trough of 95.843.
The dollar’s gains took a little of the shine off gold, which broke a six-session winning stretch and eased to $1,403.94 per ounce XAU=.
Oil prices ran into profit-taking too, having gained overnight on a larger-than-expected drawdown in crude stocks as exports hit a record high and surprise falls in refined product stockpiles.
Brent crude LCOc1 futures eased 55 cents to $65.92, while U.S. crude CLc1 lost 47 cents to $58.91 a barrel.
Additional reporting by Wayne Cole and Swati Pandey in Sydney; Editing by Angus MacSwan