US-Mexico deal sends stocks to a new high
Hope of averting trade war
WORLD stocks rose to a sixmonth high yesterday, lifted by investor optimism that a US-Mexico deal to overhaul the North American Free Trade Agreement would go some way to averting a global trade war.
Investors expect Canada too will agree to the new terms to preserve the three-nation pact, while US President Donald Trump and German Chancellor Angela Merkel spoke by telephone and the two leaders “strongly supported ongoing discussions” on trade, according to the White House.
European and Asian shares followed Wall Street’s lead, inching to multi-month highs after the S&P 500 and Nasdaq indexes surged to fresh records on Monday, led by gains in technology stocks.
The dollar slipped to a fourweek low and implied volatility across currencies and equity markets also eased, as investors took on greater risk appetite. Emerging markets hit their highest since August 9.
“Global trade tensions have undoubtedly been the most significant source of risk in 2018,” said Hussein Sayed, chief market strategist at FXTM.
“The US-Mexico deal seemed to boost confidence that the trade war was moving closer to an end, and the next question is who’s next to close a deal with Trump?” he said.
MSCI’s benchmark world share index followed on from Monday’s best performance in over four months, rising 0.15 percent, while MSCI’s index of Asia-Pacific shares outside Japan climbed 0.5 percent.
A pan-European share index rose 0.3 percent for a third straight day of gains. Automobile stocks continued to rally, adding 1.3 percent after enjoying their best day in a month on Monday – German carmakers rely on smooth trade between Mexico and the US to sell Mexican-assembled vehicles into the US markets.
However, some analysts were cautious about the rally. Paul Donovan, chief economist at UBS Global Wealth Management, noted markets were assuming already that Canada would join the new US-Mexico deal, but said: “It’s not a zero-risk process. If Canada does not join, then getting the agreement of (US) Congress will be trickier, as fast-track authorisation probably will not hold,” he said.
Disputes between the US and its trading partners have been a drag on investor sentiment for much of the year, despite solid economic fundamentals and two robust quarters of corporate earnings.
And the toughest battle in the trade war – with China – still looms. The US and China held two days of talks last week, without a major breakthrough, as another round of tariffs came into effect.
The US Commerce Department also said on Monday that Chinese steel wheels exports were heavily subsidised and it could impose duties on the product. Chinese stocks were steady to weaker, though Hong Kong’s Hang Seng index gained 0.6 percent.
JPMorgan analysts said the trade deal was not necessarily positive for the outcome of talks with China, though they said risks of a generalised global trade war had abated somewhat. “Despite this, AsiaPacific equities including HK/ China should benefit from the weaker US dollar and risk-on moves,” they added.
The dollar paused near onemonth lows against a basket of currencies and the euro was near a one-month top at $1.1680.
The greenback’s index has retreated from near 14-month highs and its losses accelerated last week after US Federal Reserve chairperson Jerome Powell disappointed dollar bu mic data – with consumer confidence figures due later in the day and the latest estimate for second-quarter gross domestic product expected today – could determine the dollar’s further moves. – Reuters