Shares crept back toward recent peaks on Monday as Chinese markets swung higher, while investors waited to see if the recent sell-off in longer-dated US Treasuries would be extended and perhaps take some pressure off the dollar.
Europe was warming up to the new week slowly but was steady enough to keep MSCI’s broadest index of world shares .MIAPJ0000PUS inching closer to February’s record top of 581.02.
Chinese blue chips .CSI300 led the way with gains of 2.35 per cent, as the country's central bank provided more medium term loans to the financial system.
Beijing had also granted a patent for CanSino Biologics Covid-19 vaccine candidate Ad5-nCOV.
But Tokyo's Nikkei .N225 fell 0.6 per cent as Japan became the latest country to confirm its biggest economic contraction on record.
A retightening of Covid-19 measures in Italy was contributing to Europe’s groggy start, although Wall Street S&P 500 futures remained a solid 0.3 per cent higher ESc1 and just below the record close of 3,386.15.
Rabobank strategist Bas Van Geffen said the past few months had seen optimism build about a strong economic bounce-back, but steps like Covid measures being reimposed were an indication of the challenges.
“We have already cautioned that this is not going to be a V- shaped recovery ... and perhaps this is a sort of a sign to the markets that it is not going to be (a V-shaped bounce)”.
The US second-quarter earnings season wraps up with major retailers reporting this week, including Walmart Inc, Home Depot Inc and Kohls Corp.
Sino-US relations remain a sticking point with US President Donald Trump on Saturday saying he could exert pressure on more Chinese companies such as technology giant Alibaba after he moved to ban TikTok.
US crude oil shipments to China will rise sharply in coming weeks, as the world’s two top economies gear up to review their January deal after a prolonged trade war.
News that the scheduled review of the US-China Phase-One trade deal over the weekend had been postponed indefinitely didn’t elicit much of a reaction.
Eyeing the fed
The highlight of the economic calendar will be the release of the minutes from the US Federal Reserve’s last policy meeting.
“Market participants will be looking for insight into the details and exact timing of when the Fed’s Monetary Policy Review will be completed, and also for more clarity with respect to the potential timing and structure of any changes to forward guidance,” noted analysts at NatWest Markets.
Speculation is rife the Fed will adapt an average inflation target, which would seek to push inflation above 2.0 per cent for some time to make up for the years it has run below it.
That combined with massive new debt supply caused a sharp increase in longer-term bond yields last week, with 30-year yields US30YT=RR rising 21 basis points as the curve steepened.
The lift in yields gave the dollar some respite after weeks of losses. Against a basket of currencies the dollar was a fraction lower at 93.016 =USD, still uncomfortably close to the recent trough of 92.521.
The euro EUR= flattened out a little late last week, having met resistance around the two-year peak of $1.1915. Yet it still ended the week with a gain of 0.5 per cent and was last holding at $1.1830 as European yields drifted lower again.
“Investors strategically long EUR/USD should stick to the position,” said CBA forex analyst Elias Haddad. “Greater Eurozone fiscal solidarity, real two‑year swap rate differentials and relative central bank balance sheet trends between the Eurozone and the U.S. suggest the fundamental uptrend in EUR/USD is intact.”
The single currency has also made a notable break higher on the yen EURJPY= to reach ground not trodden since April 2019. Indeed, the yen fell against most of its peers last week, with the dollar steady at 106.45 yen JPY= on Monday.
In commodity markets, gold firmed to $1,943 an ounce XAU=, after the jump in bond yields saw it lose 4.5 per cent last week in its worst performance since March.
Oil prices edged ahead on hopes for Chinese demand and after data showed crude oil, gasoline, and distillate inventories all declined in the week-ending August 07.
Brent crude LCOc1 futures rose 33 cents to $45.13 a barrel, while US crude CLc1 gained 38 cent to $42.39.