Bloomberg
“Stocks Rally Amid Lull in Trade War; Dollar Drops: Markets Wrap.”
Stocks advanced, while Treasuries fell as trade tensions appeared to ease after China held off from immediately retaliating against the latest U.S. salvo.
The S&P 500 Index rebounded from its biggest decline in two weeks, following shares in Europe and Asia, as China appeared to strike a conciliatory tone in reaction to President Donald Trump’s newest escalation of the trade war between the two countries. Ten-year Treasury yields pared gains, while the dollar declined against most peers after U.S. consumer prices rose less than forecast in June. West Texas crude held above $70 a barrel.
“Until you get resolution of the trade talks you’re going to see international markets underperform relative to the U.S.,” said Kevin Nicholson, chief market strategist at RiverFront Investment Group in Richmond, Virginia. The S&P 500 Index will probably trade between 2,600 and 2,800, with support from earnings growth and headwinds from trade tensions, he said. “Commodities are going to be a loser” in the trade war, and RiverFront has cut back its exposure, he said.
While markets welcome the lull in the escalation of trade tensions, they’ll remain on edge as they await a potential reprisal from Beijing to Trump’s latest volley. Investors concerns have overshadowed economic data hinting that global growth is on track as well as the start of earnings season.
Elsewhere, Turkey’s lira recovered from a record low. The won fell, with little reaction to the Bank of Korea holding its benchmark rate at 1.5 percent.
Reuters
“Trump arrives in ‘hot spot’ Britain, questioning May’s Brexit plan.”
U.S. President Donald Trump arrived in “hot spot” Britain on Thursday after casting doubt on Prime Minister Theresa May’s plans for leaving the European Union and with protests planned across the country where he says the people like him a lot.
After a NATO summit where he provoked a crisis session to force allies to raise their defense spending, Trump landed in Britain having described the closest U.S. ally in Europe as being in turmoil over Brexit.
May hopes Trump, who arrived at Stansted airport from Brussels, will help accelerate a future free trade deal, though his public comments on Brexit have cast a shadow over the visit.
The trip coincides with a tumultuous week for May after two senior ministers resigned in protest at her plans for trade with the EU after Britain leaves next March. That business-friendly Brexit proposal was agreed by her cabinet only last Friday after two years of wrangling since Britons voted to leave the bloc in a 2016 referendum.
Asked about Trump’s comments, May said: “We’re delivering on the vote of the British people to take back control of our money, our laws and our borders.”
Trump has long been a Brexit supporter and has expressed enthusiasm for a wide-ranging trade deal with Britain after Brexit, something heralded by eurosceptics as being one of the great benefits of exiting the bloc.
BBC News
“Murdoch’s Fox cleared for Sky takeover bid.”
The UK government has cleared a proposed deal for Rupert Murdoch’s 21st Century Fox to buy Sky. The British broadcaster has been the subject of a fierce bidding war between Fox and US cable giant Comcast.
Comcast’s bid has already been cleared, and Culture Secretary Jeremy Wright said Fox can go ahead if it sells Sky News. Fox has been trying to get approval from UK regulators since 2016 to buy the 61% of Sky it does not already own.
Politicians and regulators were concerned it could give Mr Murdoch too much power over the media in the UK. There were also worries about Sky News’ long-term financial viability, and how independent it would be editorially. Under takeover rules, Sky shareholders will have 60 days to come to a decision about the respective bids once the offers are formally posted.
In January, the Competition and Markets Authority said the Fox deal would not be in the public interest on the grounds of «media plurality», although it found the firm’s broadcasting standards to be up to scratch. Fox has been trying to address the regulatory concerns through concessions, including agreeing to sell Sky News to a bidder such as Disney.
Fox has also said that after the sale it will provide Sky News with funding of at least £100m a year for 15 years. US media giant Comcast threw its hat into the ring in February with a £22bn offer for Sky, trumping an offer from Fox, and starting a bidding war. On Wednesday the battle for Sky escalated, with Comcast offering a £26bn deal less than a day after 21st Century Fox increased its offer to £24.5bn.
Bloomberg
“U.S. Yield Curve to Invert in Mid-2019, Morgan Stanley Says.”
The Federal Reserve next March will probably map out an end to the contraction in its balance sheet, helping support longer-dated bond yields, which will drop below those on shorter-dated notes by the middle of 2019, according to Morgan Stanley.
“Investors are underestimating the size of the SOMA portfolio” that will be needed to keep the benchmark overnight interest rate within the range targeted by the Fed, Morgan Stanley strategists including Sam Elprince wrote in a July 12 note. SOMA refers to the System Open Market Account, the Fed’s name for its pool of assets.
The Fed started shrinking its balance sheet last October, unwinding the unprecedented quantitative easing launched during the financial crisis. The recent phenomenon of the effective federal funds rate trading toward the upper end of the Fed’s target range has been a sign to some observers that liquidity may already be getting tight.
Some Fed officials have called for a discussion about where to take the balance sheet, with the run-off scheduled to increase by $10 billion a month, to $50 billion, next quarter. Morgan Stanley’s team sees the Fed providing a detailed account of exchanges on the issue in minutes of its December 2018 meeting, expected in early January. In March, they predict an announcement on plans to end balance-sheet normalization in September 2019.
The yield curve has been flattening almost continuously since early 2017 as the Fed kept raising rates, pushing up two-year yields, while 10-year yields rose by less. An inversion has preceded U.S. recessions in the past, and some Fed officials have expressed concern about that happening. Ten-year Treasuries now yield just 27 basis points more than two-year notes.
While a larger end-point for the Fed’s balance sheet than previously anticipated should support risky assets, the help won’t arrive until the contraction ends, Morgan Stanley said. On a 12-month horizon, the strategists recommended being underweight corporate credit relative to benchmark indexes.