Pavlovian Bidding Up Of Equities

By Michael Every of Rabobank

High Hopes

US and European equities closed higher yesterday, oil prices rose more than 5%, the Dollar gained, 10-year Treasury yields lifted by 5bps and Bitcoin rose slightly following news that President Trump will pardon Binance founder Changpeng Zhao. Equity markets were buoyed by an announcement from the White House that Presidents Trump and Xi will meet next Thursday on the sidelines of the APEC conference in South Korea.

The Pavlovian bidding up of equities comes as a response to hopes that the trade détente agreed between the US and China in May, and extended in August, will again be kicked down the road past the November 10th expiry date. Both sides accuse the other of cheating on previous trade agreements. The USA points to China’s restrictions on rare earths and refusal to buy US soybeans, while China points to ongoing restrictions on the sale of high-end AI chips, fresh tariff threats and revocation of Chinese student visas as evidence of US violations.

President Trump has been striking an optimistic tone in recent days about the potential for trade agreement with China, but his optimism may reflect his own assessment of the US’s relative bargaining position rather than an expectation of mutual cooperation between the two parties. Moves overnight to open investigations into China’s compliance with the Phase One deal struck in Trump’s first term don’t fill one with confidence that the US is approaching the meeting in a spirit of collaboration, but is instead bolstering his bargaining position by building a case against legal challenges to his use of the International Emergency Economic Powers Act to impose tariffs.

Recent agreements between the US and Australia to collaborate on breaking China’s stranglehold on rare earths mining and processing went down like a lead balloon in Beijing, where officials chided the Western countries for politicizing trade. That admonishment of the West stands awkwardly alongside an outline of China’s latest five-year-plan released overnight, emphasising an even more autarchic approach to trade and technology, as well as incorporating military capabilities into the country’s development blueprint for the first time. Clearly, neither of the major belligerents in the trade war expect anything other than more self-reliance and less mutual exchange in the future.

Higher oil prices are a likely culprit for lifts in inflation breakevens that saw nominal yields rise across major sovereign curves yesterday. Fresh US sanctions on Russia’s Rosneft and Lukoil has seen a sharp price response over the last two days, which may have been helped along by a vote in the Israeli parliament orchestrated by far right parties calling for the annexation of the West Bank. J.D. Vance and Marco Rubio condemned the latter as an unhelpful stunt that threatens to undermine the fragile peace in the region. That has broader implications for US foreign policy objectives, which are concerned with normalizing relations between Israel and Gulf states to counter Chinese, Russian and Iranian ambitions in the region.

Chinese and Indian energy firms have reportedly curtailed seaborne purchases of Russian oil in attempt to avoid being hit with secondary sanctions, while trade negotiations between the USA and India have seen headlines around India cutting purchases of Russian crude in return for more favourable tariff treatment by the USA. Mysterious explosions in recent days at refineries in Hungary and Romania that have links to the Russian energy complex perhaps played a part in seeing active European gasoil futures rally for four straight days after being reported on Monday.

Vladimir Putin criticized the latest round of sanctions as an “unfriendly act” that he said will set back Russia-US relations that had just begun to improve, while conceding that the measures will have a substantial impact on Russia’s oil revenue dependent war economy. President Trump is seeking to use the harsher sanctions in conjunction with greater materiel support for Ukraine to force Putin to the negotiating table to end the war.

In other market news, Ford Motor Company surprised market analysts yesterday by recording a more than doubling in quarterly profit and topline revenue of $50bn – $7bn above analyst expectations. The company said that strong consumer demand for SUVs propelled the result, but downgraded future guidance due to revenue impacts from an aluminium supply squeeze caused by a fire at a plant in New York. Ford also said that it now expects the tariff impact on the bottom line to be $1bn this year, down from a previous estimate of $2bn following the introduction of relief measures by the Trump administration.

Ford’s result holds some similarities to what we saw from Tesla earlier in the week. Tesla recorded strong topline growth on record vehicle sales figures (helped along by the expiry of tax credits at the end of September), but unlike Ford saw profits squeezed by rising operating costs related to AI R&D. With an official data drought still underway in the US due to the government shutdown the strong topline performance of both automakers is an interesting suggestion that consumption of durable goods in the USA remains resilient and that tariff impacts are perhaps less severe than initially thought – at least for the time being.

Markets will get a further read on the state of the US economy today when official CPI figures for September are (belatedly) released. The consensus estimate on the Bloomberg survey is for a 0.4% MoM lift in headline inflation and a 0.3% lift in the core rate. That should be sufficient to see headline CPI accelerate to 3.1% YoY, but OIS futures nevertheless still have ~2 more Fed cuts priced in before the end of the year. High hopes indeed.