Shares in the Asian region kicked off the week with a rise, anticipating the positive outcome of negotiations between the leaders of the United States and China at the G20 summit, while oil prices, inspired by the last week performance, continue to recover amid threats of new sanctions from the United States against Iran.
The broad MSCI index, which includes Asian stocks other than Japan, added 0.2%, hovering near the six-week high reached last week, the Japanese Nikkei rose 0.1%. The Chinese CSI 300 and the Shanghai Composite Index preferred to wait for the outcome of the negotiations before resuming upward movement.
European stock indices came under pressure after the verdict in the IFO report, in which the climate in the corporate sector is expected to deteriorate and growth is weaker than previously thought. The IFO expectations index fell from 95.2 to 94.2 in June.
Futures on the US S&P 500 index probe the vicinity of the round mark of 3000 points, adding 0.23% on Monday. The end of last week was characterised by the take profit movement in the US stocks, so the indices closed Friday in the negative zone. It is worth noting that stocks rally inspired by the Federal Reserve fell on shares of defensive sectors (telecommunications, utilities), therefore, the assumption that the market is strengthening on the expectations that the rate cuts can extend growth of the economy remains controversial.
The S&P 500 VIX volatility index resumed its growth swaying just above the long-term average of 15 points. Investors gained positions in both bonds and stocks, the divergence between the benchmark S&P 500 and the yield on 10-year US T-bills continued to widen:
This suggests that investors’ expectations in these two markets are based on different hypotheses about the short-term future of the American economy (growth and downturn respectively). It is not clear which one will surrender first, however the convergence of expectations is necessary since the growth of both can occur only on conflicting signals.
The hawk in the Trump team Vice President Mike Pence decided to postpone the planned speech in China, which reinforces the expectations that the parties will make progress in the negotiations. I remind you that in October 2018, Mike Pence made a fiery speech, pointing out a number of gross violations in China, both in terms of economic justice and social freedoms (lack of a free market, subsidies, government surveillance and abuse of human rights).
A sober look at the true causes of the confrontation between China and the United States suggests that the parties will at best come to a compromise in the form of extending the truce.
The unpleasant news that darkens the expectations of the negotiations was the Global Times report that the American transport company FedEx might be included in the “list of unreliable entities” which effectively means same consequences as for Huawei business in the US.
On Friday, the US Department of Commerce announced that technology companies working for the Chinese Defense Ministry were added to the blacklist. They will not be able to purchase American equipment without permission from the US government.
Fed Chairman Powell may share additional details on the Fed’s position on the issue of rates on Tuesday discussing Economic Outlook and Monetary Policy.