NAFTA relief rally is global for now

NAFTA relief abounds, though watch Italian yields.

NAFTA boost holds

So, this is what a NAFTA-fuelled ‘risk’ rally looks like: a 200-odd point Dow futures rally; 0.5%-0.7% advantage for S&P and Nasdaq contracts. In China, where Washington compromise after a vociferous dispute is most pithy, Shanghai and Shenzhen indices were solidly higher. Along with momentum from a soft yen (and pro-risk implications of a Canadian dollar surge) there’s strong backing for technology shares, particularly semis and electronic components generally; sectors requiring multifarious and global supply chains. So, mutual U.S.-Canada concessions that keep the three-country system alive are a boon by association for such industries and others at the heart of trade anxieties, including in Europe. STOXX’s techs and auto and parts gauges gain, despite the new pact raising questions about the economics of car-making in relatively inexpensive Mexico. There are plenty of reasons to keep wariness in reserve in case the deal unravels. But so long as it holds, the development is undoubtedly the most effective shot in arm laggardly global equity markets have received for months.

Europe’s NAFTA loser

Sectoral fractures in Europe’s participation are mostly discrete, which is also promising. Exceptions include a fall by Ireland’s €3.9bn dairy products maker, Glanbia, which caps food and beverage indices. Selling looks based on Canada’s agreement to allow U.S. farmers access to the $16bn market there. Glanbia has negligible Canadian interests, but the implication that Canada’s 200,000-plus farmers may need to widen exports looks negative for medium-sized dairy firms already challenged by Brexit. Likewise, weak ‘travel & leisure’ shares are largely led by Ryanair. It’s not a tariff touchstone but extending its own partially Brexit-tied loss for the year by 8%, as its painful transition into a higher-cost airline continues. EasyJet duly follows and is the FTSE 100’s heaviest-weight faller, helping explain that market’s underperformance. Weak homebuilder shares, Berkeley, Barratt and Persimmon, do too, after Theresa May’s new proposal to restrict non-UK taxpayer participation in Britain’s residential property market encapsulate most of that industry’s worries.

Italian yields waver

Globally facing shares listed in Milan also help Italian stocks as a whole correct some of Friday’s sharp rejoinder to a potentially deficit expanding budget. The all-important 10-year BTP yield spread to its counterpart for bunds drifted almost 20 basis points lower from Friday’s 280.80bp peak at one point. It was reversing higher at last check. Still, the ease off gave the euro some leeway. More importantly, cheaper borrowing costs for Italian banks as BTP yields pull back relieves Italian financials, save for the most challenged (see Monte dei Paschi, IFIS, et al). Only Italy’s telecom sector remains obviously on the run, due to the value-destructive Telecom Italia saga. For bank shares, the pattern of shooting first and assessing contagion risk as more measured later is well established by now. The situation still looks sensitive though. Note shorter-dated yields were still unequivocally rallying at last look, whilst a rally in 10-year and 30-year bond prices appeared to stumble by late morning. Further fallout between Italy’s political class and technocrat executive could reignite concerns that played havoc last week. If they again spiral almost out of control, that alone could bring Europe’s NAFTA bounce to an abrupt halt.