Overview: Since the presidential tweets on May 3, the US had the initiative in the negotiations with China, but today, China has pushed back. It is cool to the idea promoted by the US that trade talks will resume shortly. Now it may take the Trump-Xi meeting at the end of next month to restart talks. This, coupled with US sanctions on Huawei banning imports from it and sales to it, threatens to disrupt business and this took a toll on Chinese, Taiwanese and Korean shares. The Nikkei gapped higher and recorded highs for the week only to settle on its lows. Ahead of the weekend election, Australia's ASX 200 reached its highest level since late 2007. European shares are lower, and the Dow Jones Stoxx 600 is shedding about a third of this week's gains, leaving it up a little less than 1%. The S&P 500 is off about 0.2% this week, after gaining the past three sessions. It looks poised to return to yesterday's lows. Benchmark bond yields are lower and peripheral European bond yields, including Italy, are leading the way a 3-5 basis point pullback. The US dollar is firmer against most of the major and emerging market currencies. The yen and Swiss franc are firm and are up about 0.25% for the week. The biggest weekly advance in more than a month has left the Norwegian krone nonplussed, but the Russian rouble is one of the two emerging market currencies to gain against the dollar this week (~0.75%). The Argentine peso is the other exception with a 0.15% gain coming into today's session.
Asia Pacific
The stepped-up sanctions on Huawei may not be related to the trade dispute, as we have maintained, but from China's point of view, it exemplifies the US efforts to contain it. Officials question US sincerity. The US has ended the tariff truce despite the on-going talks. Even if talks were successfully concluded, the US wants to keep tariffs in place, like it has done to Canada and Mexico. At the same time, officials signaled more stimulus will be forthcoming. The Shanghai Composite wiped out the small gains it had this week with a 2.5% decline today. It is the fourth consecutive weekly loss, the longest run in 10 months.
Australia holds national elections this weekend. The polls are close but show the opposition Labour with a small advantage. It poses event risk, but investors' focus is on the central bank. Speculation has mounted that the Reserve Bank of Australia could cut rates as early as its next meeting (June 4). Interpolating from the derivatives market, a nearly 70% chance of a cut has been discounted. A follow-up move also appears to have largely been priced in as well....
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