Market sentiment received a solid boost after US President Donald Trump obtained concessions from the European Union to avert a transatlantic trade war. The United States and Europe have reached a deal to work towards “zero tariffs, barriers and subsidies on non-auto industrial goods” in a bid to defuse escalating trade tensions.
In perhaps the least surprising development of the year, the European Central Bank left all its interest rates and its asset purchase program unchanged in this morning’s monetary policy meeting. Headlines from ECB President Mario Draghi’s press conference follow:
Yesterday was the definition of what we have been preaching all week. There are many themes playing out but none more important than earnings. The S&P 500 and Nasdaq began ripping higher into the close on news that President Trump agreed to suspend implementing tariffs on the EU, most importantly on autos, after meeting with European Commission President Juncker.
It has been a rather volatile couple of days in the financial markets. Much of the volatility has been in the stock markets where the major indices rose sharply late in the day yesterday after the EU and U.S. diffused their trade disputes, only for the optimism to be met with a heavy 20% sell-off in Facebook shares in extended hours on the back of the social network’s poorly received earnings report and forward guidance.
Global equity benchmarks are ripping back this morning as trade tensions have found a way into the back seat of investors’ minds. In fact, the small-cap and domestically focused Russell 2000 notched a record high on Monday, matched it yesterday and extended such gains in today’s session.
Risk-off sentiment is sweeping through global markets after U.S. President Trump fired back at China last night. He instructed the U.S trade representative to identify $200 billion worth of Chinese goods to impose a 10% tariff. Crude oil recovered very well yesterday as speculation mounted that OPEC will only raise production 300,000 to 600,000 bpd. However, this morning, crude oil is a casualty of the risk-off, trade war fears.
Although the European Central Bank is widely expected to keep monetary policy unchanged in June, investors are likely to be more concerned with the latest economic growth and inflation forecasts. Expectations remain somewhat elevated over the ECB potentially signaling an end to (quantitive easing) QE at the meeting. While hawkish comments from ECB officials and accelerating inflation have fuelled speculation over QE coming to an end, this could be a classic case where markets may be setting themselves up for disappointment.