Equities underpinned as US considers interim Chinese deal

Summary:

• Trump administration officials have discussed offering to China an interim trade agreement which would even roll some tariffs back
• Equities in Asia move higher, FX remains little changed, US yields stay relatively high
• New Zealand’s manufacturing PMI ticked up in August

Trade optimism (again)

Asian equities are moving higher this morning in response to revelations that officials from Trump’s administration have discussed the possibility of offering a limited trade deal to China in exchange for Chinese commitments on intellectual property as well as purchases of agricultural products. This news was brought by Bloomberg this morning as the agency cited as many as five people familiar with the matter. Let us recall that we got similar stories already yesterday afternoon, however, they were denied thereafter. What seems to be particularly important from these suggestions is the fact that an interim trade agreement would delay imposing new tariffs or even roll back those being already in effect (imposed by the US on Chinese goods). This seems to be bode well ahead of two rounds of face-to-face trade discussions between US and Chinese officials that will be held in Washington at the beginning of October. On the other hand, Donald Trump was a bit enigmatic in his comments on the matter saying on Thursday “A lot of people are talking about, and I see a lot of analysts are saying: an interim deal, meaning we’ll do pieces of it, the easy ones first,” and adding “But there’s no easy or hard. There’s a deal or there’s not a deal. But it’s something we would consider.” It looks like Trump could back up such a scenario or even considering doing so. That appears to be a grain of hope for investors and this is why we are witnessing quite decent gains in Asia this morning. 

Market reaction

Looking at equities one may notice that the Japanese NIKKEI is the best performing major index being up virtually 1%. Other indices are moving not far away from the Japanese stock market as the KOSPI is gaining 0.8% and Chinese indices - Shanghai Composite and Hang Seng - are going up by roughly 0.7%. Although stock markets are cheering we cannot see the same in the FX market where price movements have been much more muted, hence in the case of both G10 and core EM currencies a range of moves is as narrow as 0.1%. Upbeat sentiment is also shared among bond investors in the United States with the US 10Y bond yield hovring at relatively high levels just above 1.78%. Do notice that the yield jumped 10 basis points from the trough reached on Thursday (the low was reached during Draghi’s press conference).

The South Korean index is on track to reach its best period of gains since January this year. Source: xStation5

In the other news:

• New Zealand’s manufacturing PMI ticked up in August to 48.4 from 48.1

• Japanese industrial output rose 1.3% MoM in July (the final reading), while capacity utilization increased 1.1% MoM at the same time compared to a 2.6% MoM decline in June