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Trade talks may be back on the table

Bloomberg
A lull in the escalating U.S.-China trade conflict allowed global equities to grind higher Thursday. Yield curve flattening is hitting bond markets across Asia. And U.S. inflation edges higher. Here are some of the things that people in markets are talking about.

Time to Talk?

The U.S. and China signaled they were open to resuming negotiations over trade after days of exchanging retaliatory threats, though Treasury Secretary Steven Mnuchin said Beijing must commit to deeper economic reforms. Mnuchin told the House Financial Services Committee on Thursday that he and administration officials are “available” for negotiations, as he called U.S. tariffs imposed on China a “modest” step aimed at leveling the playing the field. “To the extent that China wants to make structural changes, I and the administration are available,” Mnuchin said on Thursday. “We are not advocating tariffs. We are advocating fair trade.”

China Braces for Pain

Meanwhile, further evidence of the trade war’s repercussions on China’s economy is set to show up in data due over the next few days, although it will likely just be a taste of things to come. From exporters of Wi-Fi equipment to households splurging on Maine lobsters and other American goods, China is beginning to adjust to the effects of the current tariffs from both nations, and the possibility of more. Hints at what’s happening will come in June’s trade data on Friday and second quarter GDP figures due on Monday. The trade war arrives as the economy is already slowing, adding an external shock to a home-made one. “There appear to be some risks to the 6.5 percent target, but the government is still committed to it,” said Chang Jian, chief China economist at Barclays Plc in Hong Kong.

Curve Flattening Goes Global

Bonds in Indonesia, India and Australia are witnessing a flattening of yield curves that’s showcasing the challenges these formerly-favored markets face as dollar liquidity tightens. While Indonesia rushed to raise interest rates to stem a rout in the rupiah, continued weakness in the currency amid an emerging-market rout deepened by the U.S.-China trade war is fanning bets for further tightening. Aberdeen Standard Investments expects the nation’s yield curve to remain flat in the near term. However, India — which last month increased benchmark rates for the first time since 2014 — will probably see its curve steepening later in the year. The same is expected for Australia, with rising yields on U.S. Treasuries seen driving the nation’s long-end borrowing costs higher.

U.S. Inflation Edges Higher

U.S. consumer prices rose 0.1 percent in June from the prior month, less than projected and restrained by falling utility prices and a record decline in hotel costs, Labor Department data showed Thursday. While that was slower than the 0.2 percent rise in May, inflation on an annual basis picked up slightly. What’s more, the 2.3 percent gain in the core gauge — which excludes food and energy costs — roughly matched the fastest pace of this expansion. After the data’s release, Federal Reserve Chairman Jerome Powell gave an upbeat assessment of the U.S. economy, but warned a sustained period of high tariffs on a wide variety of imports could be harmful to growth.

Stocks Jump, Crude Rebounds

Stocks rallied as trade tensions appeared to ease after China held off from immediately retaliatingagainst the latest U.S. salvo, and Asian stocks looked set to track U.S. gains. The S&P 500 Index closed at the highest close since February as China seemed to strike a conciliatory tone in reaction to President Donald Trump’s newest escalation of the trade war between the two countries. Technology shares led gains, sending the Nasdaq Composite Index to a record. Brent crude rebounded from the worst collapse in more than two years amid contrary indicators about whether global supplies will be scarce or abundant. Futures rose 1.4 percent in London on Thursday, while WTI closed little changed.

What we’ve been reading

This is what caught our eye over the last 24 hours.

And finally, here’s what David’s interested in this morning

What a week it’s been for the U.S.-China trade tussle story. What’s clearly changed in markets is that this is no longer just a sentiment downer but a factor that’s creeping into economic forecasts, central bank speeches and earnings guidance. Goldman slashed its forecasts for copper, nickel, aluminum and zinc on Thursday. The bank’s note said “Compared to our views at the end of last year, there is no denial that global growth has lost some of its momentum, the U.S. dollar has strengthened more than we expected, and trade tensions have escalated further than we thought.”

Another good example is South Korea. The Bank of Korea acknowledged yesterday that growth forecasts may need to be lowered and the impact on its export-reliant economy may be more than just a rounding error. It should be fascinating to see what happens in equity markets now, as the trade story starts to really collide with earnings season. I’m guessing that’s the acid test of whether market pessimism is a bit excessive.

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