We argued that the talk of trade war was exaggerated. The confrontation, strong demands and a climb down is the Art of the Deal, and is part of the way the Trump Administration negotiates. We see striking parallels between the policymakers and tactics with the Reagan Administration’s attempt to pry open Japanese markets. A combination of voluntary export restrictions and orderly market agreements are being unveiled, and are, contrary to the consensus not simply aimed at China. South Korea, for example, has agreed to limit its steel exports to the US as part of reforming the bilateral trade deal.  

However, fears of a tit-for-tat trade war was driver of the sell-off in equity markets at the end of last week. The top four steel exporters to the US last year have now been exempted from the tariffs (they account for 2/3 of the US steel imports and a little more than half of the aluminum imports). The fact that the Trump Administration is willing to declare victory with modest results suggests the “bark is worse than the bite.”  

A relief rally yesterday lifted the S&P 500 by 2.7%, the most since August 2015. That rally has lifted global equities today. The MSCI Asia Pacific Index rose 1.4%. Despite the gains, it remains below the pre-weekend high. European bourses are also moving higher. The Dow Jones Stoxx 600 is 1.25% higher in late morning turnover. The breadth is healthy as all the main sectors are advancing, led by information technology, healthcare and materials. It has poked through the pre-weekend highs but has only marginally surpassed yesterday’s high. US shares are trading higher and at pixel time, the S&P 500 is about 0.5% higher.  

Rising equities have not weighed on the debt markets. The US 10-year yield is flat at 2.85%, while European bonds yields are a little lower. Despite concerns that Italy’s Five Star Movement is moving closer to a coalition with the nationalist Northern League is not causing Italy to underperform today. The benchmark 10-year bond yield is off 1.5 bp, about the same as Spain though more than France and the premium over German has narrowed a bit.  Italian stocks are up 1.25%, slight better than Spain’s bourse.