Canada Should Expect Tough Trade Negotiations: 5 Things The Global Markets Are Talking About Today

Any trade deal is good for capital markets. Even Monday's U.S.-Mexico "non-ratified" trade announcement has been able to push U.S. stocks to new records, G10 currencies and commodities to multi-week highs.

However, even the most bullish of investors should take heed about overreacting to what also might be the latest in an extended back-and-forth between the U.S. and its trade partners.

President Trump's remarks on the U.S.-Mexico breakthrough indicate that Canada may be presented with a "take-it-or-leave-it offer." Canada's trade negotiators are expected to start talks later today.

With such an offer on the table, the Canadian economy could suffer and could prompt the Band of Canada to hold off on a rate hike on Sept 5. This in turn should put pressure on the loonie.

For the U.S. dollar, long positions are beginning to ask questions. A number of recent factors are beginning to weigh on its performance, including Fed chair Jermone Powell's dovish comments at Jackson Hole. Powell sees no reason to speed up interest rate increases — stronger U.S data momentum hasn't been realized and a flattening yield curve are somewhat negative for the dollar.

With all this in mind, here are five things the global markets were talking about Tuesday morning.

1. Stocks See The Light

European stocks found support and Asian shares edged higher as investors digested the latest developments on global trade.

In Japan, the Nikkei breached the psychological 23,000 level overnight on positive North American trade steps, but shed most of the gains on profit taking. Still, the index ended the day at its highest close in three months. The Nikkei share average finished the day up 0.1 percent, while the broader Topix closed 0.2 percent higher.

Down-under, Australian shares also advanced on trade talks. The S&P/ASX 200 index gained 0.6 percent at the close of trade. The benchmark rose 0.4 percent on Monday, while in South Korea, the Kospi closed out 0.17 percent higher.

In China, stocks ended slightly lower as investors took a breather after yesterday's very strong session, supported by the People's Bank of China (PBoC) supporting the yuan. The blue-chip CSI300 index fell 0.2 percent, while the Shanghai Composite Index nudged down 0.1 percent.

2. Oil Markets Dip On Rising Output

Oil prices are seeing some pressure, weighed down by gradually rising output from OPEC but supported by supply risks from places such as Venezuela, Africa and Iran.

Brent crude oil futures were down slightly from Monday's close, while U.S. West Texas Intermediate (WTI) crude futures CLc1 are down 11c to $68.76 per barrel.

The market is expecting U.S. inventories to rise this week as some refineries go into maintenance. Expect investors to take their cue from Tuesday's weekly inventory data.

Gold prices were holding steady after hitting a 2-week high on Monday, with the dollar under pressure in the wake of a trade deal between the U.S. and Mexico. Spot gold is trading at $1,211.31 an ounce. Prices hit their highest since August 13 at $1,212.38 on Monday, while the metal rose about 1.7 percent on Friday in its biggest one-day percentage gain in 15-months.

3. Sovereign Yields Drift Higher

A "risk-on" mood continues to prevail in the sovereign government bond markets. The 10-year Bund yield is trading broadly unchanged at 0.37 percent. However, Eurozone government bond supply is expected to pick up as the summer ends. Italy will offer €1.25-1.75 billion in March 2020-dated zero coupon notes at auction, while Finland on Monday hired banks for its own 10-year bond syndication aiming to raise €3 billion, with the transaction expected to go ahead Tuesday.

The one exception is Italian yields. The 10-year BTP yield is trading around 2018-high at 3.20 percent with news out of Italy remaining intense. Investors are concerned that Italy will overshoot its budget deficit target, along with the possibility of clash between the Italian government and the European Commission on budget and migration issues.

Elsewhere, the yield on 10-year U.S notes climbed to its highest in more than a week, while in the U.K. the 10-year Gilt yield gained 18 bps to 1.451 percent, the highest in nearly four months on the biggest gain in 5-years.

4. Dollar Looking For Direction

The mighty U.S. dollar remains on softer footing as market risk appetite continues to simmer following Monday's verbal U.S.-Mexico trade agreement. Most emerging-market currencies received a boost on hopes of a similar outcome for U.S. talks with China.

EUR/USD was probing its 4-week high as the pair edged back towards the €1.17 level. EUR is firmer despite the higher Italian yields.

GBP/USD is lagging a tad on lingering concerns about a no-deal Brexit, and the SEK is a tad softer after Swedish July retail sales data came in below expectations. The news convinced the rates market to push back its forecast for the first potential rate hike by the Riksbank until April 2019.

On Monday, the MXN rallied 0.8 percent and the CAD gained 0.5 percent outright. Fresh optimism over global trade also boosted the currencies of other exported-dependent countries, including the KWN South Korea and Chile.

Finally, China boosted the yuan to new records. Overnight, China guided the yuan 0.7 percent stronger outright, boosting the Chinese currency by the most since June 1, 2017. The PBoC fixed the dollar's midpoint for daily trading at ¥6.8052, compared with ¥6.8508 on Monday.

5. Eurozone Bank Lending Steady

Data Tuesday morning showed Eurozone bank lending grew at a steady rate last month, a trend that should support corporate investments in the region.

The ECB said that lending to non-financial corporations grew at an annual rate of 4.1 percent, the same rate as in June and the fastest pace since May 2009.

Lending to Eurozone households remained robust too, growing at an annual rate of +3.0% in July. But despite a noticeable recovery in bank lending from the 2014, lending rates have remained well below pre-crisis levels.

Related Links:

Five Years In, China's Belt And Road Looks Like A Giant Debt Trap

Mid-Day Market Update: DSW Climbs On Upbeat Results; Akcea Therapeutics Shares Slide