Overview: The markets have taken an important step away from the edge. A major threat to investors has emanated from the US as the “America First” agenda meant trade tensions with nearly every country. Trump signaled yesterday of progress in talks with China, and today the press reports that Trump as instructed his cabinet to draw up a potential trade agreement, ostensibly one that will form the basis of talks between the two presidents later this month. At the same time, the embargo against Iran that will be extended to include oil next week, is also a disruption for many. After resisting requests for exemptions, reports suggest as many as eight countries, including Iran’s largest customers (China, Japan, South Korea, and India) may get some relief.These developments are bolstering risk appetites and helping equity markets recover from last month’s bloodletting. Asia-Pacific bourses are up 3-7% this week led by China and Hong Kong. In Europe, the Dow Jones Stoxx 600 has moved higher every day this week and today’s 1%+ gain puts the benchmark up nearly 4.5% for the week. The S&P 500 is up roughly 3.7% so far this week. It gapped higher in the middle of the week, and that gap remains unfilled. The longer it is not closed, the more bullish it appears. Benchmark 10-year bond yields are firmer in the wake of the equity recovery. Core European and US yields are up five-to-nine basis points this week. Peripheral yields are up a little less.Meanwhile, the correction in the dollar after a strong performance in October continues. The only major currencies that failed to rise against the dollar this week are the yen and Swiss franc, which are often used financing currencies to purchase riskier assets. 

Trade

The US trade overtures on both exemptions for the oil embargo and toward China is spurring a collective sigh of relief by investors. The brutal equity slide in October was already easing before Trump’s comments yesterday, providing some optimism on trade, and the “instructions to the cabinet” of today’s reports. Political cynicism is making some observers concerned that this is part of Trump’s last effort to impact next week’s mid-term elections. A week ago, Kudlow, Trump’s economic adviser, bemoaned the fact that China had refused to engage the US in negotiations and did not make any counter-offers. There was a threat to take trade off the table when the two presidents meet on the sidelines of the G20 summit later this month. On the other hand, others see a pattern, whereby a crisis is manufactured and resolved with mostly a modest adjustment that seems to have been achievable without the drama and crisis.