The Tuesday Market Minute

  • Global stocks extend gains as investors react to China's easing of auto tariffs turn focus to dollar strength, inflation concerns
  • U.S. Dollar eases from five month highs as investors look for yield in flat markets
  • Oil prices returning to $80 push as Venezuelan elections prompt sanction/supply threat
  • Italy's political chaos adds new European worry as borrowing costs surge, stocks tumble, amid spending plans of radical new government
  • U.S. stock futures point to modest opening bell gains after Monday's China deal-led rally

Global stocks extended gains Tuesday as investors reacted to a significant move on trade tariffs from China and temporary easing of political pressures in Italy, both of which combined to soften the U.S. dollar and boost market sentiment. 

China's Finance Ministry said Tuesday that it will slash import tariffs on automobiles into the world's biggest car market in what could be the most significant step by officials in Beijing to placate demands of President Donald Trump to trim the country's multi-billion trade surplus with the United States. The decision, while expected, still comes just days after Washington and Beijing declared a near-term truce in the brewing dispute over tariffs and access to markets in the world's two biggest economies.

Wall Street futures strengthened on the news, with contracts tied to the Dow Jones Industrial Average  pointing to a 54 point gain for the benchmark at the opening bell. S&P 500  futures, meanwhile, are implying a gain of around 6 points to start the trading day.

European stocks also rebounded, with the Stoxx 600 index, the region's broadest measure of share prices, was marked 0.06% higher at 396.11 points, led by gains in Italy even as investors continued to focus on the political horse-trading in Rome, where President Sergio Mattarella is considering the appointment of a new Prime Minister -- Giuseppe Conte -- to lead the Five Star/Liga coalition government.

The radical left and anti-established right parties, however, continue to push their tax cutting and public spending agenda, a plan which economists and ratings agencies will both balloon the country's deficit and added to its already staggering €2 trillion debt pile.

Investors have reacted by slamming Italian stocks, sending the benchmark FTSE MIB to a six week low in yesterday's session and pushing 10-year government bond yields some 50 basis points higher over the past week to a 14-month high of 2.41%. Both markets were stronger today, however, with the FTSE MIB rising 0.6% and benchmark 10-year bond yields slipping 9 basis points to 2.32%.

The concern has also sapped demand for the euro, although the single currency did bounce back from a multi-month low of 1.1870 against the U.S. dollar to around 1.1812 as the greenback slid on the improved global sentiment. 

The dollar index, which benchmarks the greenback against a basket of six global currencies, fell 0.3% from its Monday close to change hands at 93.40, but remains closely-wedded to its 2018 high as investors bet the U.S. economy will growth by at least 3% this year and surging oil prices will stoke inflation within it.

Number of reasons to be cheerful about the global economy this morning:
1. China cutting car import tariffs
2. Italian BTPs rallying as political risks stabilise
3. No fresh wave of negative EM sentiment$USD's turning lower as a result pic.twitter.com/YZDH9grkdN

- Viraj Patel (@VPatelFX) May 22, 2018

In that respect, the ongoing rise in oil prices remained dollar-supportive, as crude benchmarks rose to new three-and-a-half year highs following the re-election of President Nicolas Maduro in Venezuela earlier this week and the likely sanctions the disputed poll will elicit from Washington.

Brent crude contracts for July delivery, the global benchmark, were seen 22 cents higher from their Monday close in New York and changing hands at $79.44 each while WTI contracts for June, the U.S pricing gauge, rose 18 cents to $72.53 per barrel.

Investors were unwilling to significantly extend Monday's gains in Asia markets, given both the lack of detail on any agreement between the two sides and the persistent strength of the greenback, which drew investors with the prospect of higher interest rates from a hawkish Federal Reserve.

The region-wide MSCI Asia ex-Japan index was marked 0.21% higher by the end of the session, having traded in negative territory for much of the day, as emerging market indices suffered from the dollar's recent gains. Japan's Nikkei 225 closed 0.18% lower on the day at 22,960.34 points.