Markets bounce back on renewed hope in trade deal

London — Stock markets rebounded on Monday as decent manufacturing data in China and renewed optimism over a trade deal eroded some of the jitters that emerged among investors last week.

The recovery in Europe followed gains in Asia, where share prices again approached record highs as investors stuck with bets that a trade deal between the US and China is imminent, something that has fuelled the rally in asset prices in recent weeks.

Last week’s decision by US President Donald Trump to sign legislation backing protesters in Hong Kong initially rattled markets, with the worry it will unravel progress made in talks between Beijing and Washington.

But investors are nonetheless sticking with the broad view that a further escalation in the trade war can be avoided.

The MSCI world equity index, which tracks shares in 47 countries, edged up 0.1% and was close to last week’s highs.

In Europe, the Euro Stoxx 600 rose 0.26% while the German DAX was 0.23% higher. French and British shares were also climbing.

Chinese data did much to help the mood after the Caixin/Markit manufacturing purchasing managers index (PMI) index rose to 51.8 in November from 51.7 in the previous month, marking the fastest expansion since December 2016.

“What we had in China at the weekend with the two PMIs being above expectation is clearly a good sign in terms of making the global stabilisation scenario more credible,” said Francois Savary, chief investment officer at Swiss wealth manager Prime Partners.

Savary noted that European manufacturing data had also posted an improvement, while eurozone inflation was higher than expected.

“Not only do we have signs of economic stabilisation, we also have a decreased risk of deflation. I am not sure if that means markets should be hitting record highs, a lot of positive news has been priced in,” he said.

In Germany, the surprise election of new leftist leaders to the Social Democrats (SPD) threatened the ruling coalition, sparking a jump in German bond yields as markets bet it would ease the path towards fiscal expansion.

The 10-year German bond yield was last up five basis points at -0.302%, a two-week high. That helped spur a sell-off across eurozone government bond markets.

US treasury yields were also notably higher, with the 10-year bond yield up by more than seven basis points at a two-week high.

The buoyant mood among investors was also evident in the US dollar, which has tended to perform well on hopes for a trade deal. It rallied to a six-month high of ¥109.73, its strongest against the safe-haven currency since May.

Currency markets were largely quiet elsewhere, with the euro little changed at $1.1016.

Investors have long thought that the US will avoid imposing an additional 15% tariff on about $156 billion of Chinese products on December 15 after signing a deal with China.

But the two countries have been so far unable to bridge the gap over existing tariffs on Chinese goods, with Beijing demanding the scrapping of them as a part of any trade deal.

“It looks a bit difficult for two countries’ leaders to shake hands and sign a deal this month. What is more likely is to essentially kick the can, with China buying more US farm products while the US postpones its next tariffs,” said Hiroyuki Ueno, senior strategist at Sumitomo Mitsui Trust Asset Management.

“Markets will consider such an arrangement as a de facto deal whether they officially sign it or not,” he said.

Oil prices recovered slightly after a big slump on Friday on record-high US crude production. The expectation that Opec and its allies are set to extend existing oil output cuts when they meet this week helped drive the rebound.

Brent crude futures rose 1.21% to $61.22 a barrel while US West Texas Intermediate (WTI) crude gained 0.85% to $56.02 a barrel.

Reuters