Asian shares inch higher on chance of China-US truce
The US Federal Reserve’s new-found concern about the global economy undermines the dollar
Sydney — Asian shares crept cautiously higher on Monday amid conflicting signals on the chance of a truce in the China-US trade dispute, while the Federal Reserve’s new-found concern on the global economy undermined the dollar.
MSCI’s broadest index of Asia-Pacific shares outside Japan tacked on 0.1% and Chinese blue chips 0.5%.
Japan’s Nikkei gained 0.4%, but e-mini futures for the S&P 500 slipped 0.3%.
Wall Street had firmed on Friday after US President Donald Trump said that he may not impose more tariffs on Chinese goods after Beijing sent a list of measures it was willing to take to resolve trade tensions.
The comment stoked speculation of a deal when Trump meets Chinese President Xi Jinping on the sidelines of a Group of 20 (G20) summit in Argentina in November.
However, China-US tensions were clearly on display at an Asia-Pacific Economic Co-operation (Apec) meeting in Papua New Guinea at the weekend, where leaders failed to agree on a communiqué for the first time ever.
US Vice-President Mike Pence said in a blunt speech that there would be no end to US tariffs on $250bn of Chinese goods until China changed its ways.
“The comments from Trump were seen as offering a glimmer of hope that further tariff action could be held in abeyance,” said NAB’s head of forex strategy, Ray Attrill.
“The exchange of barbs between Pence and Chinese President Xi Jinping in PNG on the weekend continues to suggest this is unlikely.”
Sensing a Fed shift
Also uncertain was the outlook for US interest rates.
Federal Reserve policymakers are still signalling rate increases ahead but also sounded more concerned about a potential global slowdown, leading markets to suspect the tightening cycle may not have much further to run.
“Fed officials are having an easier time showing a slightly less hawkish leaning by noting the emerging global slowdown,” said Deutsche Bank’s macro strategist, Alan Ruskin.
“It’s undercutting expectations of rate hikes moving above ‘neutral’”, which the Fed has nominated as between 2.5% and 3%. “This shift in tone is subtle, but fits with the more bullish bond market tone of late, and is starting to have a material impact on the dollar.”
That will focus attention on an appearance by New York Fed president John Williams later on Monday to see if he echoes the same theme.
Investors have already lengthened the odds on further hikes, with a December move now priced at 73%, down from over 90%. Futures imply rates around 2.74% for the end of 2019, compared with 2.93% in early November.
Yields on US 10-year paper have duly declined to 3.06%, from a recent top of 3.25%.
The dollar followed to reach 96.441 against a basket of currencies, down from a peak of 97.693. The euro was up at $1.1414, while the dollar backed off to ¥112.66.
Sterling remained vulnerable at $1.2833 after political turmoil over Brexit caused steep losses last week.
British Prime Minister Theresa May said on Sunday toppling her would risk delaying Brexit as she faces the possibility of a leadership challenge from within her own party.
With both pro-EU and pro-Brexit legislators unhappy with the draft agreement, it is not clear she will be able to win the backing of parliament, raising the risk Britain leaves the EU without a deal.
In commodity markets, gold found support from the drop in the dollar and held firm at $1,1221.92. Oil prices suffered their sixth consecutive week of losses last week, but have found some aid from expectations oil cartel Opec would cut output.
Brent crude was up 72c at $67.48 a barrel, while US crude gained 76c to $57.22.