Stocks rally as rate cut prospect offsets US-China trade war woes

Global stocks mostly rose on Tuesday with the prospect of a US interest rate cut and broader central bank dovishness helping to offset lingering US-China trade war tensions.

Bourses in Paris, Frankfurt and London all rose, along with Tokyo, Hong Kong and Shanghai.

But Wall Street finished slightly lower, with the Dow’s six-session winning streak ending.

“The market was exhausted,” said Nate Thooft, senior portfolio manager of Manulife Asset Management. “It’s digesting gains.” Investors have welcomed the recent shift in tone from Federal Reserve officials, who have hinted at a possible interest rate hike in the coming months if growth weakens due to trade conflict.

Other central bankers have also adopted a dovish slant. The European Central Bank last week extended for six months a period of ultra-low interest rates, while Brexit uncertainty has reduced expectations of a rate hike from the Bank of England any time soon.

“Safe to say, the changing expectations for interest rates is the primary reason for such a strong rebound in the (stock) markets that didn’t look particularly likely at the start of last week,” said Oanda senior market analyst Craig Erlam.

“Once again, it’s central banks that are left to fill the economic void, easing investor fears over trade wars and a global slowdown.” Friday’s weak US jobs report increased expectations that the Fed would look to cut interest rates, a possibility that also looked more likely following modest inflation data Tuesday.

Still, investors are closely eyeing trade conflicts, especially the lingering fight between Beijing and Washington.

Commerce Secretary Wilbur Ross said Tuesday that the Group of 20 summit later this month could lead to progress towards a trade deal with China but is not the venue for a “definitive agreement.” Talks between Washington and Beijing broke down last month after Trump accused China of reneging on commitments and after the United States took aim against China’s tech behemoth Huawei.

The impasse has raised hopes that, on the sidelines of the G20 leaders’ summit, Xi and Trump might jumpstart efforts at resolving the impasse. However, Ross tamped down expectations for a final agreement, which he said “is going to be thousands of pages.” “At the G20, at most, it will be... some sort of agreement on a path forward,” Ross told CNBC. “It’s certainly not going to be a definitive agreement.” But Ross said there eventually will be a deal.

Oil prices were steady on Tuesday, weighed by concerns about a global economic slowdown that could dent crude demand, but supported by expectations that OPEC and its allies will extend their supply curbs. Brent crude futures settled unchanged at $62.29 a barrel, while US West Texas Intermediate (WTI) crude futures edged up 1 cent to end at $53.27 a barrel. Prices fell after US crude stockpiles unexpectedly rose by 4.9 million barrels in the week to June 7 to 482.8 million, industry group the American Petroleum Institute said on Tuesday.

US government data is due to be released at 10:30 a.m. EDT (1430 GMT) on Wednesday.

Both Brent and WTI are down roughly 20% from their 2019 peak reached in April. Concern about slowing demand and economic growth has had a large impact on sentiment amid a trade war between the United States and China.

The US Energy Information Administration cut its 2019 world oil demand growth forecast by 160,000 barrels per day to 1.22 million bpd.

“The demand outlook is central to the oil market these days,” said John Kilduff, an analyst at Again Capital LLC. “The global economic data has been chock full of negative surprises, of late, attributable to the fallout from the U.S.-China trade war.” Beijing said it will allow local governments to use proceeds from special bonds as capital for major investment projects, in a bid to support the slowing economy amid an escalating trade war with the United States.

Supporting oil prices on Tuesday was optimism that the Organization of the Petroleum Exporting Countries and other producers such as Russia would extend an output cut deal that has been in place since the beginning of the year to prop up prices. The group, known as OPEC+, is due to meet in late June or early July to decide whether to extend the pact.

Russian energy minister Alexander Novak said on Monday there is still a risk that oil producers pump out too much crude and prices fall sharply, suggesting Moscow might support an extension.

The comments, along with remarks from Saudi Arabia, bolstered expectations the deal will be renewed.

Russia’s average oil output stood at 11.04 million bpd on June 1-10, up from an average of 10.87 million bpd on June 1-3, two sources familiar with official data said on Tuesday. Oil output in the first three days of June was the lowest since mid-2016, according to Reuters calculations.

Reuters