Risk Assets Rise on US-China Trade Truce

 

US, China Call Time-out

Financial markets opened the week with a risk-on mentality in response to Sunday’s news that both the US and China would be holstering their tariff swords while the nations continue trade negotiations.  The announcement specifically applied to the $150 billion in tariffs that the US had previously imposed on China, of which China planned to retaliate with $50 billion of their own tariffs.  Overall, the suspension of tariffs has been viewed by market pundits as a step in the right direction, however the threat of action by either side is not completely off the table.  Commenting on the situation, National Economic Council director Larry Kudlow stated “Tariffs are suspended right now, that’s a good thing, but you cannot remove tariffs as a negotiating tool or an enforcement tool from this process.”  Treasury Secretary Steven Mnuchin echoed a similar sentiment as he warned that the “President can always put tariffs back on”.     

 

 

Market Reaction to the News

US stocks finished the session with broad-based gains, as the DJIA (+1.20%) posted the largest rise amongst major indices in celebration of the trade-friendly announcement with the world’s second largest economy.  Separately, the S&P 500 increased 0.75% while the NASDAQ finished 0.55% higher.

 

 

Treasurys experienced a mild selloff, as yields/swap rates climbed 1-2bps across the curve and the 10-year note yield finished the session near 3.06%.  With minimal key economic releases on the schedule for tomorrow, bond markets will await the release of the FOMC minutes from its May meeting on Wednesday afternoon to access a more detailed look into the Fed’s views of the current state of the economy and expected path of rate hikes.

 

 

The US dollar rose to a new 5-month high against major currencies.  The euro continues to be held down by the political uncertainty in Italy, where the two representative populist parties (Five Star Movement, League party) have made progress to form a coalition government which threatens to further strain the nation’s debt profile.    

 

 

In commodities markets, crude prices fluctuated throughout the session before settling nearly 1.25% higher, as the future of the Iran sanctions remains in limbo.  WTI futures are currently hovering above $72.25/barrel (3.5-year high).  Among the precious metals, gold prices touched as low as $1,281/ounce to its new low for the year as investors reduced holdings of the haven asset.