Stocks rallied on Tuesday after President Donald Trump fuelled hopes for a trade deal with China and Mario Draghi offered markets the clearest indication yet that the European Central Bank is ready to launch another round of stimulus if needed.
Meanwhile, a rally in government bonds lost some steam in response to Mr Trump’s tweet, as concerns of coming headwinds for the global economy receded.
Germany’s benchmark medium-term bond yield hit a fresh record low amid a striking rally in European government debt. The 10-year Bund yield touched a record low of minus 0.329 per cent, to leave investors buying the debt and holding to maturity facing an even greater guaranteed loss.
Italian 10-year government bond yields fell around 20 basis points to take them to their lowest level in a year, while the yield on the US 10-year Treasury note fell as much as 7 basis points on the day to hit its lowest level since September 2017. Yields fall when prices rise.
The 10-year Treasury yield was down a softer 2.6 basis points in recent trade after Mr Trump said he will have an “extended meeting” with Chinese president Xi Jinping during next week’s G20 meeting in Japan.
“Our respective teams will begin talks prior to our meeting,” Mr Trump wrote on Twitter, saying he had a “very good” conversation with Mr Xi.
Wall Street’s S&P 500 advanced 1 per cent in afternoon trade in New York. The tech-heavy Nasdaq Composite jumped 1.4 per cent, buoyed by chipmakers.
The composite Stoxx Europe 600 rose 1.7 per cent, while the euro traded 0.2 per cent lower against the dollar after Mr Draghi’s comments, although its fall was briefly interrupted after Mr Trump accused the central banker in a tweet of purposely weakening the euro with his suggestion the eurozone economy may need additional stimulus.
Mr Draghi had said indicators pointed to signs of “lingering softness” in the economy in the coming quarters, adding that if the outlook for inflation failed to improve then additional stimulus must be needed.
“From the market reaction, we are increasingly learning that when a central bank’s senior leaders vindicate expectations, market shifts extend,” said Themos Fiotakis, head of FX and rates strategy at UBS.
Investors are also looking ahead to the conclusion of the US Federal Open Market Committee’s meeting on Wednesday, where it is expected to keep interest rates steady despite markets pricing in a small chance of a cut.
Risk assets have rallied on hopes of multiple rate cuts through this year, and James Solloway, chief market strategist at SEI Investments, said the Fed will be “threading a policy needle” this week.
“It is not prepared to ease monetary policy at this meeting, but it will want to convey to investors that it is ready to act in the event of a policy shock, such as the imposition of tariffs on all Chinese imports,” he said.
The Bank of England and the Bank of Japan will meet on Thursday, with no moves expected from either.
Chipmakers fell in Europe after Siltronic, a German manufacturer of silicon wafers used in chips, became the latest company to warn on trade tensions.
But the Philadelphia semiconductor index, which tracks 30 companies that make and distribute chips, popped 4.1 per cent following Mr Trump’s tweet. US semiconductors are seen as vulnerable to tariffs and have come under pressure during the trade spat.
Australia’s S&P/ASX 200 index rose 0.6 per cent, while the country’s currency slipped after the central bank confirmed it was likely to cut interest rates further.
In the foreign exchange market, the pound hovered near the 2019 lows touched in the previous session as political uncertainty and weak economic data weighed on the currency.