“Trump formula" rescues global shares

North Korea's surprisingly conciliatory reaction to the White House’s summit cancellation helped global markets stage a swift rebound from Thursday's slide

“Trump formula” to the rescue


A surprisingly conciliatory reaction by Pyongyang to the White House’s cancellation of an historic summit underpinned a swift return to calm over global markets.

Kim Yong-un keeps schtum

Notable silence from the Supreme Leader’s office helped. Kim Jong-un and officials close to him were the source of much “hostility” that was pivotal to President Donald Trump’s decision to cancel. Instead, the Vice Foreign Minister said Pyongyang held out hope of a “Trump formula” to resolve the impasse. Asian stock market tension abated sufficiently for South Korea’s KOSPI to close just 0.2% lower, in step with moderated falls across most Asia-Pacific indices. European stock markets were supported by signs that the dollar was ending its consolidation. Frankfurt’s DAX was leading, driven 1% higher by a rebound in auto stocks after a loud pushback from the industry to Trump’s threat to impose new car import tariffs. Despite the late-week bounce though damage was already done to European stocks, leaving the broad STOXX index facing its first weekly fall since the end of March.

Dollar revives

The less alarmed stance by global investors to Thursday’s events helped the dollar find firmer ground after retreating in the middle of the week. This backs the view that weakness coinciding with Fed minutes interpreted as dovish was a consolidation of month-long gains that could soon resume, not the start of a sustained reversal. Traders appeared hasty to secure gains from safe-haven yen and Swiss franc spikes, partly with an eye to a long weekend ahead in the U.S. and UK. The yen last traded at 109.42, with the dollar above a tightly drawn declining trend line from November for a second straight session. Weak Tokyo inflation data added yen pressure. The dollar needs a close above corroborated ¥111.18 resistance (a 38.2% Fibonacci of the June-December 2016 rally) to begin the next leg of its rally in earnest.

No rest for sterling, euro

Sterling was becalmed after Thursday’s promising rise. It was far short of the nearest critical resistance at $1.3455, the launchpad to early-2018 post-Brexit highs. Brussels and Dublin insist the ‘backstop’ customs option is the only acceptable one, dismissing Downing Street’s suggestion that the UK could adopt the EU’s external tariff regime beyond 2020. At the same time, Westminster voting mathematics are changing. Further Conservative moderates have edged heads above the parapet. Latterly trading down 26 pips at $1.3354, sterling faces a test of December/early-January support at $1.3325. Looming bank loan repayments from the ECB together with persistently unsettling Italian political news also pulled the euro both ways. June is the first early repayment date for c.€400bn in ECB loans intended for the real economy (TLTROs). Around a quarter is expected to be repaid. This would support the euro and could harden the resolve of the ECB to signal a rate rise after turning off the QE taps at the end of the year.

5-Star/League splinters appear

By then, Italy’s unconventional and mostly inexperienced government might well have collapsed. For now, developments kept euro trade cautious whilst Italian yields ticked only slightly lower, limiting contagion risk. No ministerial confirmations are likely till this evening. But the 5-Star/Northern League pushes ahead with plans to expand spending despite debts worth 130% of GDP. The 81-year old Eurosceptic former minister, Paolo Savona, tapped as finance minister, was backed again on Thursday by the League’s leader Matteo Salvini. As he did so, anonymous sources told the media of their distaste towards “welfare giveaways” supported by 5-Star. Market apprehension remains in Italy, but expectations that the coalition’s differences could soon destabilise the pact have begun to trim risk aversion.

Turkey’s lira drags EM rebound

Emerging market shares joined the rebound on alleviated concerns over Korea, though with the dollar showing signs of a resumed advance and Treasury yields slowing their fall, emerging market currencies could soon be pressured again. Turkey’s lira remained at the epicentre of such concerns. A boost from the CBT’s 3% rate hike on Thursday quickly dissipated, leaving the lira’s loss so far this year above 20%. Speculators recognise the central bank’s wary eye to President Erdogan, keeping policy hamstrung and behind the curve.

Russia and OPEC eye the exit

Like the less sure-footed dollar, weakening oil prices also offered a lifeline to emerging market debt and currencies, after Russia’s energy minister signalled it could gradually raise output. It comes a day after Saudi Arabia said OPEC over-compliance with production limits, due to threatened Iranian and constrained Venezuelan supply, would be discussed at OPEC’s June meeting.

Whilst typically volatile, U.S. Durable Goods data for April on Friday afternoon could be another reveille for the greenback if they belie expectations for a 1.4% fall after March’s 2.6% rise. The ex-transportation orders consensus forecast sees a 0.5% rise.

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