Stock Rally Set to Stall on Crucial European Commission Meeting

The stocks rally that has been going on for three straight days was on the verge of stalling on Wednesday with investors awaiting the meeting between US President Donald Trump and the President of the European Commission.  The meeting was to see where the global trade friction was going next.

Asian stocks had gone up overnight after Wall Street had reached a five-month high, prolonging a month-long advance.  However, tech and commodity stocks in Europe fell early as the market’s attention shifted to the possible fate of tariffs

EU trade commissioner Cecilia Malstrom stated on Wednesday that the bloc was planning to introduce tariffs on $20 billion of US goods if Washington slaps levies on imported cars.

A monthly survey over German business confidence also manifested some impacts from the trade spat.  On the other hand, there was no major plunge, and traders in many markets appeared content to hold their positions steady.

China’s yuan had retreated off a 13-month low.  This also eased some of the jitters the market felt.  Meanwhile, most currencies, bond benchmarks, and oil were trapped in tight ranges.

“We have seen a lot of complacency over this entire trade war so the question is unless we see a very negative outcome (from the EU-US meeting), are we going to see a marked reaction?” said Bas Van Geffen, a Rabobank strategist.  “It is an odd one where two key trade partners, but also two key allies, are now fighting each other.”

Another batch of multinational corporate earnings is coming.  There’s a European Central Bank meeting incoming, as well as US GDP figures set to be released this week.  This paves the way for great volatility ahead.

The US dollar index, which tracks the dollar’s performance against a basket of six other major currencies, was just off a two-week low at 94.506.  It barely moved at $1.1692 against the euro, while it was at 111.24 against the yen.

The 10-year Treasury note yields, which tend to serve as the benchmark for global borrowing costs, slipped to 2.937 percent after it soared to a 6-week peak of 2.973 percent overnight.

Bond yields have been soaring this week on the speculations that the Bank of Japan is nearing the stoppage of its aggressive stimulus program.

However, with the ECB meeting on the horizon, most bond yields in the euro area also fell down on Wednesday.

Britain’s pound crept up to $1.3150 following UK Prime Minister Theresa May’s announcement that she would now lead the negotiatons on the country’s departure from the European Union bloc.

Turkey’s lira was also a bit higher after sinking over 3 percent on Tuesday.  This came after its central bank refused to raise rates in what was seen as another blow to its tainted credibility.

Aaron Hurd, who is a State Street Global Advisors currency portfolio manager, said that the worry is that President Tayyip Erdogan’s government will set pressure on the central bank to keep rates lower, sparking the country’s already double-digit inflation rate.

“The new (finance) minister and the new cabinet in total is an unknown quantity and we have to wait and see and learn how to interpret their behaviors,” said Hurd.  “That means an even higher risk premium priced into the currency.”

The Shanghai Composite Index closed a tad lower after reaching a one-month high and enjoying a nearly 3 percent surge this week. 

Tokyo’s Nikkei finished 0.5 percent higher.  Hong Kong’s Hang Send index gained 0.9 percent, while South Korea’s KOSPI dropped 0.4 percent.   Overall, MSCI’s broadest index of Asia-Pacific shares outside Japan increased 0.4 percent.

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