The shares of Asian firms switched from rally to slump on Tuesday, rejecting the Wall Street offer to follow its bull lead. Investors have become more cautious about long equity positions after the release of mixed data on the Chinese economy, as well as some updates on the US-China talks on trade issues.
Oil prices jumped to 3.5-year peak on fears about drop in supplies from Iran, while the dollar rose due to increased outflow of investors from the bond market.
European markets opened lower, Chinese stock markets showed growth on Tuesday, despite retail data lagged behind the forecasts. Improvement of business in the industrial sector allowed investors to cheer up, as the measures of the Chinese government to reorganise the economy threatened to slow down production activity. In April, retailers sold 9.4% more than in the same month last year, the forecast was 10%. However, the industrial sector produced 7% more than last year, although the market anticipated an increase of 6.4%, which far exceeded the forecasts. The largest stock exchanges in China, such as ShComp, DJ Shanghai, SZSE Component grew by about half a percent.
Mixed news temporarily suppressed optimism associated with the inclusion of Chinese blue chips in the widely-monitored benchmarks of the MSCI index.
The Japanese Nikkei interrupted its ascent to the peak of three months, giving up 0.1% today. However, this decline is more like a short-term correction, as investors hike decided to make a breather before the appearance of new details on the Sino-US trade dispute and Trump’s meeting with the leader of North Korea.
Despite progress in resolving the trade dispute between China and the United States, both countries are “still far from eliminating trade frictions”, the US Ambassador to China, Terry Branstad said on Tuesday before the second round of talks in Washington. Recall that Trump has weakened rhetoric in relation to ZTE pledging that the US will leave its market open for Chinese company. For China, this was the cornerstone of the success of the talks, without which they would not even consider the possibility of a trade-off.
While energy price inflation usually leads to an increase in inflation for end products, which leads to a decrease in demand for them (higher price – less demand), this time expectations of sustainable demand have allowed to cast doubt on what will happen to corporate profits. The US stock markets did not collapse, despite the fact that the yield (the cost of borrowing) has risen above 3%. Investors also hope that firms will start hiring more that will increase salaries, which will support the purchasing power of workers. To that, stock markets are growing thanks to the emergence of reliable locomotives, such as oil companies and other companies involved in the extraction or processing of oil.
Both benchmarks are traded near the opening of Tuesday, but the spread between Brent and WTI is growing, which indicates problems with overproduction in the US and a possible decrease in supply from Brent. Now it has reached more than seven dollars per barrel, although until recently it fluctuated about five dollars.
In addition, the phase of increasing the world economy, will mean a stable growth in demand, which is also a positive moment for prices. For example, in China, the volume of processing increased by 12% compared to the previous year to 12M barrels per day, making this the second largest historical record. The OPEC report showed that now stocks in OECD countries exceed the average for five years by only 9 million barrels, while in January 2017 this figure was 340 million barrels.
The dollar retreated from the weekly low, amid weakening fears over the China-US conflict in trade. Continuation of the outflow from the bond market supported demand for the dollar.
The foreign exchange market index of the US currency increased by 0.3% to 92.80. The dollar was hit by the euro earlier on Monday after an official of the European Central Bank, said that the guidance on raising rates could be issued after the program of asset purchase program is completed. The US currency was able to repel a part of the losses after the president of the Federal Reserve Bank of Cleveland, Loretta Mester, announced the need to gradually raise rates.