Equities surge on Xi-Trump trade truce

Summary:

• The US and China have agreed not to levy more tariffs on their imported goods, Trump has allowed Huawei to buy equipment from US firms
• Russia and Saudi Arabia have reportedly agreed to extend current oil production cuts by 6 to 9 months, OPEC meeting starts today
• Chinese PMIs for June came in close to expectations, a disappointment from Australia
• US dollar rallies in early European trading against its G10 peers as markets believe the Fed could hold off on easing monetary policy

Trade truce

A meeting between Donald Trump and Xi Jinping was eagerly awaited by market observers as it was to set sentiment across financial markets. Indeed, it actually did so and after announcing a trade truce between the two countries equity markets opened clearly higher on Monday. The Chinese Shanghai Composite is rallying 2%, the Japanese NIKKEI is jumping 2.2% while futures on DAX or SP500 are pointing to a green opening being 1% up in early European trading. What did the US and China agree to? First and foremost, the US promised to not impose new tariffs on Chinese goods (thus, there will be no retaliatory duties from China as well). Secondly, both countries agreed to restart trade negotiations and some details still need to be sorted out. Thirdly, Donald Trump decided to allow Huawei to purchase equipment from US companies adding that he and Xi agreed to leave the “complicated” Huawei issue until the end of what appears to be an open-ended trade truce. In our view, the last part of this agreement could mean for markets the most as the trade truce was already discounted by markets to some extent at the end of last week. A Trump’s decision on Huawei shows that US President had to ease his stance being (probably) under pressure of US tech companies. To sum up this thread, while the announced truce could be encouraging, it has yet to solve the trade dispute and lots of tariffs already imposed remain in place. Thus, equities might find it hard to push much higher only on information we got over the weekend.

The SP500 futures opened at its new all-time high following the trade truce agreed to by the US and China. Source: xStation5

Output cuts to stay

Oil prices are on the rise this morning in part due to rising demand for riskier assets. In addition to that, we also got another reason to justify higher oil prices, namely a preliminary agreement reached between Russia and Saudi Arabia to extend current crude production cuts by 6 to 9 months. Both countries were to reach a consensus at the G20 summit just before the OPEC meeting kicking off today. Thus, it looks like a further output cuts extension is a done deal, hence a response to the official agreement to be announced on Tuesday should be rather limited. Both grades are rising 2.6% in early trading in Europe. 

Brent oil prices are approaching the important resistance in the form of an intersection of 50/200 DMAs. Source: xStation5

In the other news:

• June Chinese manufacturing PMI slipped to 49.4 from 49.5, services PMI remained at 54.2

• June Australian manufacturing PMI plunged to 49.4 from 52.7

• South Korean exports fell 13.5% YoY, imports fell 11.1% YoY in June

• Gold prices fall 1.6%, the US 10Y bond yield trades at 2.034%