Stocks, oil gain as hopes for trade talks rise

European stocks and US equity futures were higher on Wednesday after a report fuelled optimism about progress in US-China trade talks, offsetting disappointment about the size of potential US interest rate cuts.

Global shares had opened weaker after comments by Federal Reserve Chairman Jerome Powell and St. Louis Fed President James Bullard tempered the market’s bets on aggressive US rate cuts next month.

But US futures suggested a higher open for Wall Street and European equities gained after CNBC reported that US Treasury Secretary Mnuchin said the U.S.-China trade deal is 90% complete.

Nasdaq futures were up 0.8% and S&P 500 futures indicated a 0.5% rise. The pan-European STOXX 600 was last flat to slightly higher as some analysts doubted the comments revealed anything new. The MSCI World Shares index was down 0.1%.

“What he (Mnuchin) actually said was that we were 90% of the way there, which is where we were in April,” said Michael Hewson of CMC Markets. “The big question is have we gone backwards or forwards from here.” The United States hopes to revive trade talks with China after US President Donald Trump and Chinese President Xi Jinping meet in Japan during the G20 summit on Saturday. However, Washington will not accept any conditions on tariffs, a senior administration official said on Tuesday.

Richard Dias, multi-asset strategist at Pictet Asset Management, said he did not expect an immediate resolution.

“Everyone is desperate for a deal, but why would they do it then? It is a lot more than just trade, trade is a red herring, what matters is technology, and I don’t know how we are going to agree on this,” Dias said.

“What incentive does Donald Trump have to do a deal now, anyway,” Dias said. “It is better to drag it out until before the election and show a big win.” Comments by Fed Chair Powell downplaying market expectations for a cut of half a percentage point in US interest rates also undermined stocks.

Powell said the central bank is “insulated from short-term political pressures”. But he said the Fed was grappling with whether Washington’s conflict with trading partners and tame inflation require a rate cut.

The dollar rebounded and gold prices retreated after Powell’s comments. The dollar rebounded from three-month lows against a basket of other currencies in the previous session at 95.843. It was up 0.1% at 96.222.

Equity markets have rallied this month in anticipation of Fed rate cuts, but Powell’s remarks cast doubt on those expectations.

According to latest data from CME Group’s FedWatch programme, federal funds futures implied that traders now see a 27% chance the Fed will lower rates by half a percentage point in July, compared with 42% on Monday.

However, not all see the comments as evidence of a policy u-turn. Pictet’s Dias said the Fed had effectively backed itself into a corner, making a cut in July or September highly likely.

“So many cuts are priced in and the market has rallied on this news and the bond market has rallied, so if they don’t deliver what they have telegraphed, their credibility will be impinged,” he said.

He expects a cut of 25 basis points. “They would never do 50 bps. We are not in a recession,” he said.

A sell-off in US Treasuries, which often sets the tone for other major bond markets, failed to have much effect on the eurozone. Ten-year Treasury yields fell to 1.98% on Tuesday, before rising above 2% on Wednesday.

European bond yields remained at record lows, unmoved by the apparent shift in tone from the Fed. Germany’s 10-year benchmark bond yield held around -0.31%.

And with the seemingly insatiable bid for bonds continuing, Austria opened books on a 100-year bond, a tap of its existing September 2117.

Gold pulled back from the near-six-year highs it reached on Tuesday amid escalating tensions between the US and Iran, slipping more than 1% on Wednesday.

US crude oil futures advanced roughly 2% to a four-week high of $59.10 per barrel after data showed a decline in US crude stockpiles. Oil prices rose on Wednesday, buoyed by an outage at a major refinery on the US East Coast and industry data that showed US crude stockpiles fell more than expected.

Front-month Brent crude futures, the international benchmark, were up $1.24 at $66.29 per barrel by 1345 GMT.

US West Texas Intermediate (WTI) crude futures were at $59.44 per barrel, up $1.61 from their last settlement.

Philadelphia Energy Solutions is expected to seek to permanently shut its oil refinery in the city after a massive fire caused substantial damage to the complex, two sources familiar with the plans said on Tuesday.

The plant, located in the busiest and most densely populated part of the US east coast, had already declared force majeure on some gasoline supplies following the fire. US gasoline futures hit their highest level since end-May on Wednesday.

Reuters