Thursday 21:00 BST
What you need to know
● Stock markets inch higher amid caution ahead of Trump-Xi summit
● Fed balance sheet shift and tardy US tax reform unsettles mood
● Brent oil makes fresh test of $55 a barrel level
● Euro bounces off three-week low after Draghi comments
● Treasuries becalmed and gold slips
US stocks staged a modest rally after the previous day’s late sell-off but the mood remained hesitant amid uncertainty about the Federal Reserve’s balance sheet intentions and doubts about President Trump’s fiscal stimulus plans.
There were also signs of nerves ahead of the start of a summit between Mr Trump and Xi Jinping, his Chinese counterpart, as well as the release on Friday of US non-farm payrolls data.
However, Wall Street did find some support from a fresh rally for oil prices, which saw Brent retest the $55 a barrel mark. The dollar edged higher against the yen and the euro — pushing gold slightly lower — while Treasuries were little changed.
But the big focus for markets remained the minutes of the Federal Reserve’s policy meeting last month, published on Wednesday, which helped turn a gain of about 0.8 per cent for the S&P 500 to a closing loss of 0.3 per cent.
The minutes not only highlighted that “some” Fed participants viewed equity prices as “quite high” relative to standard valuation measures but that the central bank could start reducing its balance sheet as early as this year, provided the economy stayed on track.
There was no mention of any potential pause in the Fed’s rate rise cycle.
“Unwinding a $4.5tn balance sheet would imply a significant reduction in global liquidity and is no mean feat, especially when the Federal Open Market Committee is simultaneously hiking rates,” said Stefan Koopman, market economist at Rabobank.
“This may explain the nervousness in the market.”
Meanwhile, Paul Ryan, the speaker of the House of Representatives, was quoted in a media report on Wednesday as saying the White House, Congress and the Senate were not even “on the same page” regarding planned tax reforms. That helped fuel concerns that a key plank of Mr Trump’s economic agenda could still be some way away.
What to watch
Also keeping traders in a cautious mood was the summit in Florida on Thursday and Friday between President Donald Trump and his Chinese counterpart Xi Jinping.
Antje Praefcke, analyst at Commerzbank, said that discussions between the pair were unlikely to be easy.
“Both are fully aware of the significance of the bilateral trade relations and reciprocal market access but are limited in their ability to compromise due to political restraints.
“Mr Trump took a very clear stance right at the start of his presidency — very aggressively criticising the Chinese trade surplus with the US as well as the allegedly overvalued currency. So it will be difficult for him to now take a much more lenient stance towards China and to sell this politically.”
Nevertheless, Wall Street managed to put such worries to one side as the S&P 500 equity index inched up 0.2 per cent to 2,357, although trading was again choppy.
The Dow Jones Industrial Average and the Nasdaq Composite also edged higher.
European stocks put in a mildly positive showing too — with the Stoxx 600 gaining 0.2 per cent — as participants brushed off steep falls earlier in the day for shares in Tokyo and Hong Kong.
Japan’s Topix shed 1.6 per cent to close at a four-month low, while Australia’s S&P/ASX 200 was down 0.3 per cent.
In Hong Kong, the Hang Seng index was off 0.5 per cent, while on the mainland, China’s Shanghai Composite added 0.35 per cent to a fresh four-month high as sentiment continued to be supported by the government’s move to establish a special development zone in the province of Hebei.
Government bond markets were becalmed with the yield on the 10-year Treasury down 1 basis point at 2.34 per cent and that on the two-year note flat at 1.25 per cent. The German 10-year bond yield ended at 0.26 per cent, also steady on the day.
“The increased focus on the Fed’s balance [sheet] strategy could already be contributing to the recent pullback in short-term US yields, which has undermined support for the US dollar in the near-term,” said Lee Hardman, analyst at MUFG.
The dollar edged up 0.1 per cent against the yen to ¥110.78 after giving back much of a solid advance against the Japanese currency on Wednesday.
The euro was 0.2 per cent softer versus the dollar at $1.0642, after pulling off a three-week low of $1.0630 as the markets digested comments by Mario Draghi, president of the European Central Bank.
“Mr Draghi has delivered the most forceful defence of the current policy stance in an effort to push back on recent rumours surrounding the risk of potential changes in the [ECB] deposit rate,” said Eric Theoret, FX strategist at Scotiabank.
“Mr Draghi underscored the need for confidence in inflation converging toward the 2 per cent target, and suggested that there is currently ‘scant evidence of this’.”
The Czech koruna was a notable mover, strengthening by 1.6 per cent to 26.608 per euro after the country’s central bank removed the upper limit on its currency but pledged to intervene if any rally got out of hand.
Oil prices moved higher once again as participants attempted to look beyond record high levels of US crude inventories.
Brent settled at $54.89 a barrel, up 1 per cent on the day and not far off Wednesday’s one-month intraday high of $55.09. US West Texas Intermediate crude was 1.1 per cent higher in late trade at $51.69.
The dollar’s modestly firmer tone helped push the gold price down $3 to $1,251 an ounce.
Additional reporting by Peter Wells in Hong Kong
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