September 5, 2019 / 7:53 AM / 11 days ago

Daily Briefing: World markets take heart from China, Italy and Brexit

(Reuters) - Politics conspire to lift world markets for a change. After a torrid August, political developments on several fronts – the U.S.-China trade war, Brexit, Hong Kong’s standoff and Italy’s election risk – have all taken a positive twist this week from a markets point of view.

FILE PHOTO: A trader works on the trading floor at the New York Stock Exchange, September 3, 2019. REUTERS/Andrew Kelly

Global share markets were lifted overnight after China confirmed formal trade talks with Washington would resume next month, a day after Hong Kong’s Hang Seng staged a near 4% rally on signs the HK authority was killing the controversial extradition bill that’s triggered months of violent street protests.

Stock benchmarks in Shanghai, Tokyo and Seoul all jumped between 1%-2%, with MSCI’s all-country index up about 0.45% so far on Thursday.

U.S. and European stock futures were both up almost 1%, after a 1% rally in the S&P500 on Wednesday. China’s offshore yuan strengthened back to its best levels since Aug. 23, with the dollar steadying more broadly after a sharp retreat on Wednesday.

Ten-year U.S. Treasury yields popped back higher and tried to regain 1.5%, with the 2-10-year yield curve flipping back positive to the turn of couple of basis points (even though the curve from 3-months to 10 years remains deeply inverted).

In Britain, sterling rallied as Prime Minister Boris Johnson was defeated for the third time this week late on Wednesday by a parliamentary push to prevent him taking the country out of the European Union without a deal on Oct. 31.

Anti-Brexit and Boris Johnson messages are projected onto the Angel of the North sculpture in Gateshead

Johnson’s attempt to hold a snap general election before new legislation forcing him to seek a Brexit extension also failed. The pound’s trough-to-peak rally from Tuesday’s near 3-year low was as much as 2.53% as traders saw the chances of a “no deal” Halloween Brexit crash ebbing.

Bookies odds put the chances of any Brexit on Oct. 31 back down to about 30% - from about 50-50 late last month. With the chances of an autumn election still very high, as opposition parties will likely back one once they are confident a “no deal” crash next month has been averted, the pound backed off slightly from its overnight highs first thing.

The upper house is currently in the process of rubber-stamping the new legislation to tie the government’s hands.

In Italy, Prime Minister Giuseppe Conte on Wednesday unveiled his new coalition cabinet between Five Star and the centre-left PD party – with PD MEP Roberto Gualtieri named as economy minister and speculation the incoming coalition will heal the rift with Brussels over budget policy.

Italian 10-year sovereign yields, which have almost halved since the middle of August set a new record low of 0.803% on Wednesday before steadying this morning. Euro/dollar held above $1.10 first thing after surging back above that level on Wednesday.

But markets are not watching political developments alone, and there are some signs that the worst fears for global growth may be wide of the mark.

Citi’s economic surprise index for the G10 major economies, although still marginally negative, has risen to its best levels in almost a year and global shipping prices captured by the Baltic Dry index rose 10 days in a row through yesterday to their highest level in nine years.

There was a reality check from the volatile German industrial orders series this morning, however, as they recorded a bigger-than-expected 2.7% drop in July.

Next week’s European Central Bank meeting is now in focus and while there has been some speculation the more aggressive expectations of further rate cuts and an immediate resumption of bond buying may be disappointed, there is little doubt the ECB is determined to keep easing policy until it gets traction on a higher inflation rate and expectations – a policy underlined on Wednesday by incoming ECB chief Lagarde.

Ten-year German bund yields nudged up to -0.61% briefly first thing after one of the biggest jumps of the year on Wednesday. With the Fed meeting the following week, the focus there is on the August employment report – a foretaste of which we will see in the ADP private sector jobs reading later on Thursday.

— A look at the day ahead from EMEA markets editor Mike Dolan. The views expressed are his own —

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