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“Hope” Drives Demand for Riskier Assets

James Hyerczyk
It’s hard to conclude based on the reports that the United States and China are even close to an agreement. So I have to disagree with some headlines which suggest prices rose because of a “potential” deal that will end the long trade impasse. Tuesday’s rally was all based on hope. Hope of a dovish Fed and hope of a meeting between Trump and Xi.

There’s an adage that says “Hope, fear and greed are the main emotions driving financial markets.” On Tuesday, it was hope’s turn. The major U.S. equity markets were underpinned early by the hope the Federal Reserve would deliver a dovish enough message on Wednesday that rate cuts are coming. Shortly after the opening, prices soared on the hope that a meeting between U.S. President Trump and China President Xi Jinping would lead to an eventual trade deal between the two economic powerhouses.

In the cash market on Tuesday, the benchmark S&P 500 Index settled at 2917.75, up 28.08 or +1.00%. The blue chip Dow Jones Industrial Average finished at 26465.54, up 353.01 or +1.39% and the technology-based NASDAQ Composite closed at 7953.88, up 108.86 or +1.43%.

Fed Kicks Off Two-Day Meeting

The Fed kicked-off its two-day meeting on Tuesday. Policymakers are expected to leave rates unchanged (about 20% priced in). However, investors will be focusing on whether the central bank opens the door to further rate cuts later in the year.

As of Tuesday’s close, financial futures traders were pricing in three rate cuts before year-end, according to the CME Group’s FedWatch tool. Traders are placing the probability of a June rate cut at 20%. The chance of a July 31 rate cut is 84.70%. The probability of a September rate cut is 94.60%.

Trump Tweet Fuels Second Wave of Intraday Buying

The major stock indexes spiked higher after Trump said he will be meeting with his Chinese counterpart, Xi Jinping, at the upcoming G-20 summit in Osaka, Japan.

Trump said in a tweet he “had a very good telephone conversation” with Xi. He added: “We will be having an extended meeting next week at the G-20 in Japan. Our respective teams will begin talks prior to our meeting.” The summit is scheduled to start on June 28.

Investors labeled the news as optimistic although China remained quiet about whether Xi would agree to a face-to-face meeting with Trump. However, Chinese state media reported shortly following the announcement that Xi had agreed to meet with Trump at the summit.

Current and former Trump administration officials and trade advisors have cautioned that a potential meeting with Xi is not likely to yield a trade agreement on its own, but could help clear the path to a deal.

It’s hard to conclude based on the reports that the United States and China are even close to an agreement. So I have to disagree with some headlines which suggest prices rose because of a “potential” deal that will end the long trade impasse.

Tuesday’s rally was all based on hope. Hope of a dovish Fed and hope of a meeting between Trump and Xi.

This article was originally posted on FX Empire

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