Asian stocks relieved at trade truce, bonds step back

Stocks rallied and bonds retreated in Asia on Monday as a thaw in the Sino-US trade dispute averted one threat to the global economy, leading investors to pare wagers on aggressive policy easing by the major central banks.

The dollar firmed modestly on the safe-haven yen as Treasury yields rose and futures reined in bets for a half-point rate cut from the US Federal Reserve this month.

“The Trump-Xi G20 meeting looks to be a modest win for China and a positive for risk assets short term, but well within the range of expected outcomes,” said Westpac economist Richard Franulovich. “Fed cut expectations are likely to see a sustained trimming, though more so for their meeting on July 31 than over the next year,” he added. “A 50 basis point rate cut seems very unlikely.”

The initial reaction was one of relief that new tariffs were avoided and Japan's Nikkei climbed 1.6 per cent to a two-month top. MSCI's broadest index of Asia-Pacific shares outside Japan added 0.4 per cent.

Chinese blue chips climbed 2.1 per cent to their highest since late April. E-Mini futures for the S&P 500 rose 0.8 per cent and FTSE futures 0.5 per cent. Treasury futures slid 10 ticks as yields on 10-year notes edged up 3 basis points to 2.03 per cent.

Fed funds dropped over 5 ticks as the market scaled back the probability of a half-point rate cut this month to around 13 per cent, from nearer 50 per cent a week ago.

The United States and China agreed on Saturday to restart trade talks after President Donald Trump offered concessions to his Chinese counterpart Xi Jinping when the two met at the sidelines of the G20 summit in Japan over the weekend. These included no new tariffs and an easing of restrictions on tech company Huawei in order to reduce tensions with Beijing. China agreed to make unspecified new purchases of US farm products and return to the negotiating table.

Slowdown

Still, no deadline was set for a deal and much damage has already been done, with two surveys of Chinese manufacturing out over the weekend showing a contraction in activity.

The official Purchasing Managers' Index (PMI) held at 49.4 in June, just missing forecasts, while the Caixin/Markit PMI dropped to 49.4, the worst reading since January. Surveys from Japan and South Korea showed similar slowdowns.

“Although a worst case outcome has been averted, the threat of tariffs remains and it is unlikely the truce gives much confidence to firms' investment and hiring decisions,” said Tapas Strickland, a director of economics at NAB. “As such, it is likely that soft manufacturing conditions will persist until if and when a fuller agreement is fleshed out.”

The reaction in currency markets was to strip some recent gain from safe harbours like the yen and Swiss franc. The dollar crept up 0.2 per cent on the yen to 108.15 and gained 0.4 per cent on the franc to 0.9801.

The dollar added 0.2 per cent on a basket of currencies to 96.355 , but was little changed on the euro at $1.1355. The dollar dipped 0.3 per cent on the Chinese yuan to 6.8432. The dollar's gains took some of the shine off gold, which fell 1.2 per cent to $1,392.86 per ounce.

Oil prices sprang higher on news OPEC and its allies look set to extend supply cuts at least until the end of 2019 as Iraq joined top producers Saudi Arabia and Russia in endorsing the policy. Brent crude futures rose $1.27 to $66.01, while US crude gained $1.19 to $59.66 a barrel.