May 21, 2018, by Lorcan Roche Kelly
“We’re putting the trade war on hold,” Treasury Secretary Steven Mnuchin said Sunday after the U.S. and China issued a joint statement following talks in Washington. While the de-escalation of rhetoric between the two sides is a welcome development, analysts are warning that the lack of details in the plan, which would see China increase imports of U.S. goods and services, will likely see tensions return. In the short term, with tariffs on hold, agricultural commodities are set to be the biggest winners.
The leadership of Italy’s populist coalition is set to name their choice for prime minister, with newspapers in the country reporting that Giuseppe Conte, a 53-year old law professor with no political experience, is the leading candidate. Among the ( many) things concerning markets about the new administration is the plan to issue “ mini-BOTs,” which would have some of the features of a parallel currency, leading to concerns about the country’s already pressured debt profile. Italian 10-year yields were trading at 2.258 percent by 5:45 a.m., a 170 basis-point spread over the similar German security.
Dollar strength – for now
The recent rally in the dollar continued this morning as tensions with China eased. With the pound and the euro hitting new year-to-date lows against the greenback, investor attention is turning to how much longer the appreciation can continue. Analysts point out that valuations are becoming stretched, and rising U.S. yields coupled with the country’s worsening twin deficits mean the currency is now vulnerable to a selloff. Legg Mason Inc.’s Richard Lawrence said that President Donald Trump’s administration is unlikely to stop the currency from weakening.
Overnight, the MSCI Asia Pacific Index slipped 0.2 percent, while Japan’s Topix index closed 0.1 percent lower with banks and insurers the biggest losers. In Europe, the Stoxx 600 Index was 0.4 percent higher by 5:45 a.m. as an earlier selloff in Italian stocks eased. German equity markets were closed for a holiday. S&P 500 futures pointed to a gain at the open, the 10-year Treasury yield was at 3.073 percent and gold was lower.
Central bank speakers dominate the economic agenda today, with Atlanta Fed President Raphael Bostic due at 12:15 p.m., Philadelphia Fed President Patrick Harker at 2:05 p.m. and Minneapolis Fed President Neel Kashkari at 5:30 p.m. The minutes from the most recent Federal Reserve policy meeting are due to be released on Wednesday. Speaking of central banks, the race to succeed Mario Draghi as president of the European Central Bank is starting to heat up, with Bundesbank chief Jens Weidmann and outgoing Finnish Governor Erkki Liikanen both commenting on the issue over the weekend.