Equities trade higher on US-Mexico agreement

Summary:

• US President Donald Trump announced there would be no tariffs against Mexico
• China produced a higher than expected trade surplus in May
• Equities rally in Asia, US dollar gains across the board except the Mexican peso

US-Mexico agreement

At the end of the past week investors were concerned about the possibility of US tariffs imposed on Mexico, however, the issue was resolved yet before New York investors headed for the weekend. On late Friday US President Donald Trump sent a tweet where he wrote that both countries reached an agreement. Trump added “The tariffs scheduled to be implemented by the US on Monday, against Mexico, are hereby indefinitely suspended.” According to media revelations Mexico promised to take strong measures to stem the tide of migration by reducing or eliminating altogether illegal immigration. On top of that, Mexico is to buy large quantities of agricultural products from the US. There is no doubt that this is a positive news for the global economy as well as financial markets as it reduced the risk of a further escalation of protectionism. Nevertheless, a deal with Mexico does not mean the end of trade concerns as the US and China seem to be far away from a binding agreement. Therefore, today’s widespread increase in equities could prove to be a short-lived bounce.

Either way, the equities performance seen this morning may be impressive with the Hang Seng (CHNComp) leading the gains and surging 1.9%. The Shanghai Composite is rising 1.1%, the Japanese NIKKEI (JAP225) is going up 1.3% while the Australian index (AUS200) is climbing 1%. Upbeat moods were also seen on late Friday in the United States where the NASDAQ (US100) gained almost 1.7% while the SP500 (US500) and the Dow Jones (US30) added 1% each. A response to the US-Mexico deal is also seen in the currency market with the broad-based rally in the greenback. In turn, the Mexican peso is soaring as much as 2.2% against the US dollar. To sum up, the US-Mexico deal is good for the global economy in the short-term, but it does not constitute a breakthrough in a rise of protectionism globally.

The Hang Seng is rebounding from the important technical support localized slightly above 10200 points. From this standpoint bulls could hope to head to 10580 points or so. Source: xStation5

Chinese imports slump

Trade data for May from China showed a huge 8.5% slump in imports compared to the same period last year, while exports grew 1.1% in annual terms. It is worth noting that imports surprised to the downside, whereas exports came in well above the median estimate. As a result, a trade surplus totalled $41.65 billion compared to $13.84 billion in April. What do these prints mean? A noticeable decline in imports could be another sign of weakish domestic activity in the world’s second largest economy. In turn, higher exports could be attributed to a front-loading effect, keep in mind that the US decided to increase a tariff rate to 25% from 10% on $200 billion of Chinese goods on May 10 (effective on June 1). Such a hypothesis is also reflected by a higher trade surplus with the US which totalled $26.9 billion compared to $21.1 billion in April.

China saw a higher than expected trade surplus in May due to fading domestic demand as well as increased exports in anticipation of higher tariffs. Source: Bloomberg

In the other news:

• Boris Johnson, the front-runner to succeed Theresa May as UK Prime Minister, promised income tax cuts for three million people

• US Treasury Secretary Steven Mnuchin said that he had “constructive” talk on trade with PBoC Governor Yi Gang

• US 10Y yield trade at 2.122% this morning after reaching 2.05% in the aftermath of the employment report