European stocks and US equity futures were higher on Wednesday after a report fuelled optimism about progress in US-China trade talks, offsetting disappointment about the size of potential US interest rate cuts.
Global shares had opened weaker after comments by Federal Reserve chairman Jerome Powell and St Louis Fed president James Bullard tempered the market’s bets on aggressive US rate cuts next month.
But US futures suggested a higher open for Wall Street and European equities gained after CNBC reported that US treasury secretary Mnuchin said the US-China trade deal is 90 per cent complete.
Nasdaq futures were up 0.8 per cent and S&P 500 futures indicated a 0.5 per cent rise. The pan-European STOXX 600 was last flat to slightly higher as some analysts doubted the comments revealed anything new. The MSCI World Shares index was down 0.1 per cent.
‘What he (Mnuchin) actually said was that we were 90 per cent of the way there, which is where we were in April,’ said Michael Hewson of CMC Markets. ‘The big question is have we gone backwards or forwards from here.’
The United States hopes to revive trade talks with China after US president Donald Trump and Chinese president Xi Jinping meet in Japan during the G20 summit on Saturday. However, Washington will not accept any conditions on tariffs, a senior administration official said on Tuesday.
Richard Dias, multi-asset strategist at Pictet Asset Management, said he did not expect an immediate resolution.
‘Everyone is desperate for a deal, but why would they do it then? It is a lot more than just trade, trade is a red herring, what matters is technology, and I don’t know how we are going to agree on this,’ Dias said.
‘What incentive does Donald Trump have to do a deal now, anyway,’ Dias said. ‘It is better to drag it out until before the election and show a big win.’
Comments by Fed chair Powell downplaying market expectations for a cut of half a percentage point in US interest rates also undermined stocks.
Powell said the central bank is ‘insulated from short-term political pressures’. But he said the Fed was grappling with whether Washington’s conflict with trading partners and tame inflation require a rate cut.
The dollar rebounded and gold prices retreated after Powell’s comments. The dollar rebounded from three-month lows against a basket of other currencies in the previous session at 95.843. It was up 0.1 per cent at 96.222.
Equity markets have rallied this month in anticipation of Fed rate cuts, but Powell’s remarks cast doubt on those expectations.
According to latest data from CME Group’s FedWatch program, federal funds futures implied that traders now see a 27 per cent chance the Fed will lower rates by half a percentage point in July, compared with 42 per cent on Monday.
However, not all see the comments as evidence of a policy u-turn. Pictet’s Dias said the Fed had effectively backed itself into a corner, making a cut in July or September highly likely.
‘So many cuts are priced in and the market has rallied on this news and the bond market has rallied, so if they don’t deliver what they have telegraphed, their credibility will be impinged,’ he said.
He expects a cut of 25 basis points. ‘They would never do 50 bps. We are not in a recession,’ he said.
A sell-off in US Treasuries, which often sets the tone for other major bond markets, failed to have much effect on the euro zone. Ten-year Treasury yields fell to 1.98 per cent on Tuesday, before rising above 2 per cent on Wednesday.
European bond yields remained at record lows, unmoved by the apparent shift in tone from the Fed. Germany’s 10-year benchmark bond yield held around -0.31 per cent.
And with the seemingly insatiable bid for bonds continuing, Austria opened books on a 100-year bond, a tap of its existing September 2117.
Gold pulled back from the near-six-year highs it reached on Tuesday amid escalating tensions between the US and Iran, slipping more than 1 per cent on Wednesday.
US crude oil futures advanced roughly 2 per cent to a four-week high of $59.10 per barrel after data showed a decline in US crude stockpiles.
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