Trade optimism as world stocks hit highest in almost two years

Emerging Markets currencies weaken versus dollar

LONDON: World stocks hit their highest in almost two years yesterday, keeping record highs in sight, following fresh signs that the United States and China were working to end a bitter trade war that has dealt a blow to the global economy. China’s Vice Premier Liu He, US Trade representative Robert Lighthizer and US Treasury Secretary Steven Mnuchin held a phone call on issues related to a phase one trade agreement yesterday, China’s commerce ministry said.

This, alongside a strong Hong Kong debut for Chinese e-commerce giant Alibaba in the world’s largest share sale of this year, boosted stock markets in Asia. Alibaba shares opened almost 7% higher in Hong Kong than their issue price and at a small premium to pricing in New York. The listing has been seen as a vote of confidence in Hong Kong after months of anti-government protests that have rocked the former British colony. European shares were marginally lower in early trade although the pan-European STOXX 600 remained within striking distance of four-year highs.

MSCI’s 49-country main world share index edged up 0.1%, having touched its highest level in almost two years. It is less than 1% off record highs hit in early 2018. Trade in US stock futures were a tad firmer. A flurry of major acquisition activity has also supported world shares, with France’s LVMH offering to buy US jeweler Tiffany & Co and Charles Schwab Corp’s agreeing to purchase US discount brokerage TD Ameritrade Holding Corp. Still, optimism over US/China trade talks remained the key driver following positive headlines from the world’s two biggest economies on this front in recent days.

“While it is easy to be skeptical about these sorts of reports, given we’ve heard them so many times before, particularly the ones about a roll back of tariffs, they do tend to create a momentum all of their own,” said Michael Hewson, chief market analyst at CMC Markets. “Even when they are denied, and no matter how cynical you are, it has tended to be a fool’s errand in standing in the way of any move higher.” The United States has imposed tariffs on Chinese goods in a 16-month long dispute over trade practices that the US government says are unfair. China has responded with its own tariffs on US goods.

The next important date to watch is Dec 15, when Washington is scheduled to impose even more tariffs on Chinese goods. Japan’s yen fell to a two-week low of 109.205 per dollar, while the Swiss franc traded near a sixweek low against the greenback as the optimistic tone sapped demand for safe-haven currencies. In the offshore market, the yuan briefly rose to a one-week high of 7.0188 versus the dollar. Yields on safe-haven government bonds in the euro zone nudged higher, although the limited rise in borrowing costs suggested caution from bond investors.

“What we have seen, especially if I look at the equity side, is that the optimism (on US/China trade talks) is quite high so we rather have the potential for a risk-off move,” said Sebastian Fellechner, a rates strategist at DZ Bank in Frankfurt. Elsewhere, Bitcoin, the world’s biggest cryptocurrency, was 1.6% firmer at $7,236.71, recovering from a six-month low on Monday after the People’s Bank of China launched a fresh crackdown on cryptocurrencies. US crude was flat at $58 a barrel. Brent crude was also little changed on the day at $63.66 per barrel.

EM currencies weaken

Currencies in the developing world traded slightly lower yesterday as the dollar strengthened on encouraging signals in US-China trade relations, and with South Africa’s rand weakening after a warning from the International Monetary Fund. MSCI’s index of emerging market currencies dipped 0.1%, while the dollar hit its firmest level in two weeks against Japan’s yen earlier yesterday.

China’s Commerce Ministry said top trade negotiators from both sides held a phone call yesterday, and discussed “core issues of concern”. “Investors are just waiting for more details before increasing their exposure to riskier assets, and definitely the dollar in this situation is benefiting,” said Piotr Matys, emerging markets FX strategist at Rabobank. “It’s a bit of, why take the risk and trade in EM assets when you can just continue buying the dollar.” South Africa’s rand weakened after the IMF said on Monday that the country faced a prolonged period of weak economic growth marked by rising unemployment, inequality and greater credit-rating risk if the government did not act fast to implement reforms. “Nothing new from the IMF, it is just a reminder that there are some serious issues and tremendous challenges South Africa faces to try and put the economy on a sustainable path,” said Matys. The warning came as South Africa dodged a sovereign rating downgrade from S&P Global Ratings. The Turkish lira remained rangebound, while Turkish stocks edged slightly lower.

Russia hopes to seal a deal to supply Turkey with more S400 missile systems in the first half of 2020, which analysts feel could pressure the lira by further antagonizing the United States, a country Turkey has had volatile relations with in recent times. Currencies in central and eastern European economies including Poland and Romania dipped slightly against the euro. Hungary’s forint touched a new record low, extending declines to a sixth straight session.