Ger30, UK100 and SP500 are CFD’s, written over the Dax30, Footsie100 and S&P500 Index futures:
In the pre-opening, the European indices rehearsed with some gains. Today will be the scene of the contrast between two factors. On one hand, the good performance of Wall Street, which should benefit the most cyclical sectors in Europe. But on the other hand, investors will have to face a new upward movement in yields but this time has a different nature. Yesterday, the session was driven by a rise in sovereign yields, but unlike in previous days, was not due to the political situation in Italy. Spurring the new upward movement of these interest rates were statements by Peter Praet. The ECB’s Chief Economist has stated that this institution is progressively more confident that it will reach its goal of 2% of inflation. These statements indicate that during next week’s meeting the topic on the end of the debt acquisition program will certainly be debated. The words of Peter Praet gain more weight because this member of the ECB is considered to belong to the moderate wing of this institution. The rise in yields in all its maturities pressed stocks of utilities and banks. The increase in yields generated a positive movement in the Euro that could limit the positive effects of the Wall Street valuation in the more cyclical sectors. One last note refers to the mining sector, since in the Asian markets the price of copper rose more than 2% to a new high in the last 3 months, due to the depreciation of the Dollar and some fears related to a decrease in supply of this raw material. Recall that, in addition to having multiple industrial uses and being used as collateral in lending in China, copper is nicknamed in the financial markets by Dr.Copper because its cycles anticipate the cycles of the global economy.
US markets closed with sharp rises. The market rally is explained by some developments in the field of US trade relations with other economies and by some more technical factors. In a context of heightened trade tensions between the US and several countries, yesterday’s trade deficit is crucially important. In fact, this deficit has been the Trump Administration’s main “weapon” to justify revising the trade agreements agreed in the past. In April, the trade deficit narrowed by 2.10% to 46.2 million M.USD, short of the 49,000 M.USD anticipated by economists. This was due to the fact that exports reached a record, boosted by exports of industrial equipment, oil and its by-products and soy. More relevant than the analysis of the trade balance as a whole is to scrutinize the figures for the economies with which the US has been revising its trade relationship. The deficit with China increased by 8.10% in April to 28,000 M.USD (monthly number). Exports to this country fell by 17%, while imports remained unchanged. In relation to Mexico, the deficit decreased by 29.80% to 5700 M.USD. Compared to Canada, the United States had a low deficit (800 M.USD). However, within the Trump Administration there have been some more moderate voices on this issue. According to some news sources, Treasury Secretary Mnuchin would have argued, in a meeting with President Trump, Canada’s exemption from the new tariffs on steel and aluminum. In addition, Chief Economic Advisor to President Larry Kudlow said that Donald Trump is committed to resolving the trade dispute he has with key partners. Still under this theme, according to the Wall Street Journal, China would be willing to acquire another 70 000 M.USD of American goods as a gesture of goodwill to resolve the dispute between the two countries. Apart from the technology sector and small caps (a pattern that has been repeatedly observed in recent days), American markets were driven by banking stocks. These securities benefited from higher long-term yields versus short-term yields (as a result of the ECB’s chief economist’s intervention) and from investor purchases which saw recent losses from the sector as an investment opportunity.
Asian markets mostly closed higher, reflecting the good performance of the US stock market. The only exception was the Shanghai stock exchange whose session was marked by some profit taking after 3 consecutive earnings sessions.