Markets are extruding a bit of skepticism and exhaustion when it comes to US-China trade negotiations. US Treasury Secretary Steven Mnuchin sound positive in remarks on trade talks yesterday stating they have “made a lot of progress”. He stated that the Chinese trade delegation including PBoC Governor YI Gang, would be traveling to Washington in October indicating “good faith”. Mnuchin stated that “conceptual” agreement on enforcement concerns had been agreed on. The issue of monitoring and enforcement seems to be a major blocker for moving forward. Finally, throwing in a grenade to risk appetite, he stated that President Trump has no problem keeping tariffs on China if a deal cannot be reached. Wall Street was un-impressed as S&P 500 was flat and DJIA eked out 0.1% gain. Today, concerns over slow developed on trade have held equities down. Also hurting sentiment, data indicated that China's factory-gate prices contracted, dropping deeper into the deflationary zone and underpinning the need for Beijing to increase economic stimulus as the trade war with the US drags-on. Rates, however, were more active, with a sharp rise in global bond yields. US yield curve shifted higher with US 10-yr yields jumping 8bps to 1.64% and 30-yr yields climbed 10bp to 2.13%. German 10-yr yields increased 5bp to -0.585%.
Oil also has a big day with WTI up 2.7% as Saudi Arabia's energy minister signaled there would be no drastic shift in his country's (or that of OPEC) oil policy to lower production by 1.2 million barrels per day. Rumors of a fiscal stimulus out of Germany have support Euro buying (offsetting further ECB easing). Todays, the calendar is light with JOLTS job opening potential providing insight into the strength of US labor market deceleration. In broad terms, while US-China trade tensions and Brexit threaten growth they also force looser financial conditions. Expansionary monetary policy has the support risk appetite for the last 12 years and will continue to do so.
By Peter Rosenstreich