Monday, 3 April 2017

Second quarter off to a firm start for stocks as Trump-Xi meeting looms

World stock markets and the U.S. dollar started the second quarter on a positive note on Monday, although caution also set in as the first meeting between U.S. President Donald Trump and China's Xi Jinping loomed.

European shares touched a 16-month high , tracking Asian shares up after generally upbeat economic data.

German manufacturing growth reached an reached an almost six-year high in March, Markit's Purchasing Managers' Index (PMI) for manufacturing showed on Monday. Manufacturing activity in France and Italy also rose, adding to signs of a pickup in momentum in the global economy.

A private survey on China's manufacturing on Saturday came in below market expectations but still showed a healthy expansion after a similar survey by the government on Friday pointed to strong growth in the sector.

The Bank of Japan's "tankan" survey showed that business sentiment improved, albeit slightly less than expected.

MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS rose 0.2 percent, while Japan's Nikkei .N225 gained 0.8 percent after hitting a seven-week low on Friday.

U.S. stock futures were flat, indicating a note of caution as focus turned to earnings and a meeting on Thursday and Friday between the U.S. and Chinese presidents.

"Despite the solid gains seen so far this year, there is some evidence that the rally in U.S. markets is looking a little tired given President Trump's trials and tribulations in Congress," said Michael Hewson, chief market analyst at CMC Markets.

"The reflation trade is likely to face a new test this week when President Trump entertains the Chinese leader Xi-Jinping at his Mar-a-Lago golf course in Florida, which in the words of President Trump himself could be a little 'difficult'."

A failure to push through healthcare reforms last month has added to concerns that Trump may struggle to pass highly anticipated tax cuts and infrastructure spending bills.

Trump held out the possibility on Sunday of using trade as a lever to secure Chinese cooperation against North Korea and suggested Washington might deal with Pyongyang's nuclear and missile programs on its own if need be.

On Friday, the U.S. president sought to push his crusade for fair trade and more manufacturing jobs back to the top of his agenda by ordering a study into the causes of U.S. trade deficits and a clampdown on import duty evasion.

Any hints that Washington may name some of its trade partners such as China, Japan and Germany as currency manipulators could dent the dollar. The U.S. Treasury will release its next currency report on April 15.

"The meeting between Trump and Xi is very important because if they can form some sort of mutual interest, it will be in their mutual benefit, however, if the differences grows even further, then it spells more problems for the dollar," said Naeem Aslam, chief market analyst at Think Markets UK.

The dollar index .DXY, which measures the dollar's value against a basket of other major currencies, was up 0.28 percent at 100.63 - above four-month lows hit last week.

U.S. monetary policy also remained in focus with U.S. jobs data due out on Friday, while in Europe April marked the start of a fall in the European Central Bank's monthly asset purchases to 60 billion euros from 80 billion euros.

Governments and other economic actors need to get ready for higher borrowing costs after years of record lows, ECB Executive Board member Benoit Coeure said on Monday.

The euro was little changed at around $1.06, but 0.4 percent firmer against sterling, which fell after data showed British manufacturing lost momentum last month.

South Africa's rand was another currency nursing losses. It fell 1.5 percent to two-month lows on worries about a ratings downgrade following last week's dismissal of respected finance minister Pravin Gordhan.

The Pound

Sterling slipped on Monday after data showed British manufacturing lost momentum last month, the latest sign the economy may be running out of steam after its surprising resilience in the wake of last year's Brexit vote.

Financial data company Markit's purchasing managers' index (PMI) survey suggested growth in the sector had slowed in the first three months of this year, as export orders increased more slowly and demand for consumer goods faltered amid accelerating inflation.

The manufacturing PMI slipped to a four-month low of 54.2, undershooting a forecast of 54.6 in a Reuters poll and marking the third straight month of falls.

Sterling, whose 20 percent tumble since last June's vote to leave the European Union had helped manufacturers enjoy their fastest annual growth in three years during the final quarter of 2016 as the currency hit 31-year lows, fell below $1.25 after the survey's release, down from $1.2534 beforehand and leaving it down 0.6 percent on the day.

"Clearly the data was disappointing, and this is sterling behaving as it should," said Barclays currency strategist Hamish Pepper. "It was a very strange environment that we found ourselves in post-Brexit, where data was irrelevant."

"What we've seen building this year is that we have the currency behaving in a normal, rational way – data surprises to the downside result in weakness and to the upside result in strength. That makes it an easier currency to deal with."

The pound has stabilised this year, trading broadly in a range of between $1.20 and $1.27. And traders and analysts say that now that the formal process in which Britain will depart the EU has been triggered, focus is returning from politics to fundamentals.

One of the main concerns around the economic effect of Brexit had been Britain's huge current account deficit, which swelled to as high as 7 percent last year.

But data last week showed an almost halving of Britain's current account deficit as a percentage of output, and a rise in foreign direct investment to 110 billion pounds, offering hope that one of the economy's big vulnerabilities may be fading.

Against a broadly stronger euro, the pound slipped 0.7 percent on the day to 85.39 pence.

Data released on Friday from the Commodity Futures Trading Commission showed speculators trimmed their record-high bets against the pound in the week to last Tuesday.

"The short is finally shrinking, but is still huge," wrote Societe Generale macro strategist Kit Juckes.

"That probably leaves us in no man's land for a while longer but we still like euro/sterling longs for the long run, pairing two 'cheap' currencies and buying the one that isn't sticking pins into a wax image of its economy."

Reference: Dhara Ranasinghe

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