Skittish buying interest returns to risky assets during a pause in the barrage of new U.S. trade restrictions.
Buy on the sound of confusion
There is also some logic in the view that, whilst the administration appears divided over policy, there may be a tactical advantage for investors. Trade Secretary Mnuchin has officially rescinded his May view that a trade conflict with China was “on hold”. Overnight, he said new restrictions on investing in the U.S. tech sector would not just apply to China, but "to all countries that are trying to steal our technology.” Initial details stated restrictions would kick in above a 25% threshold of Chinese ownership. The Treasury Department is meant to issue recommendations on the new limits on Friday. Indications that the White House has yet to finalise them may delay implementation. Trade Secretary Navarro – amongst the most hawkish White House voices on trade – later muddied the water further. He said the proposals would only target China. At this point markets, are treating confusing guidance as a de facto positive, as any delay that results offers a chance for less damaging trade solutions to prevail.
European stock indices mostly shrug off the downdraft seen overnight in Asia with gains of around 0.3%-0.8%. This follows the biggest one-day fall by the region’s shares since late March, so the rebound can’t necessarily be interpreted as anything other than the normal bounce that often follows a sharp sell-off for now. STOXX’s fall narrowly exceeded an almost identical slide in the first week of March, so Monday sentiment should be read as akin to the mood during much of February and March, when volatility was resurgent. Whilst subsequent gyrations were of incrementally lower intensity, market nerves remained heightened for weeks. On Tuesday, a similar dynamic applies to U.S. stock market futures which also rose in the first half of the morning, after their deepest declines in two months. They have now reversed most of those gains.
Figure 1 - absolute change chart - STOXX Europe 600 - daily intervals
Source: Thomson Reuters and City Index
No knee-jerk dollar benefit
What’s risky for shares continues to be risky for the dollar. At 94.40, DXY remains becalmed near the lowest since 14th June and clearly under the influence of the range of that day which bottomed at near 93. Aside from policy uncertainty, traders appear unclear of how much inflationary and yield benefit to apply to the greenback from potential economic volatility. Safety seeking yen advances continue to chip away at the greenback’s upside attempts. In turn, the 10-year Treasury yield is up for only a fourth day out of 10. It is 11.7 basis points off its latest tag of the 3% level on 13th June. The drift of favour back to benchmark Treasurys reflects difficulties in assessing the impact of deteriorating trade relations. The cross-border nature of modern supply chains suggest we will see unintended negative outcomes on all sides. Canadian and Aussie dollar have already signalled potential pressure; the yen, backed by a large current account surplus and safe-haven appeal, has moderately benefitted. At the same time, China’s yuan has declined to 6-month lows on signs Beijing is devaluing by stealth. The knee-jerk expectation from CNY weakness would normally be dollar strength, but ambiguous trading across dollar pairs makes the outcome far less predictable.
How are you, U.S, consumer?
A depleted June macroeconomic schedule will keep an unhealthy level of focus on trade developments. Only a U.S. Conference Board Consumer Confidence release has probable broad interest on Tuesday, as a gauge of how the stream of interventionist White House policies may be affecting inclination to consume. After a disappointing Philly Fed activity release last week, which some linked to a pause in investment appetite on a more uncertain business outlook, regional Fed indices for June from Richmond and Dallas may see more attention than usual. Even so, more eyeballs will be on U.S. retail and goods data on Wednesday, final GDP on Thursday, plus a second look at Britain’s Q2 growth and the Fed’s favoured PCE inflation measure on Friday.