Tuesday 21:00 GMT

Overview

The S&P 500 US equity index reached a record intraday high while Treasury bonds gave back all of the previous day’s strong gains and the dollar rallied modestly as concerns about president Donald Trump’s protectionist trade policies showed signs of easing.

The better tone to equities came as participants digested US corporate earnings and as a broadly positive batch of survey data helped underpin a moderately optimistic view on the prospects for global economic growth.

Sterling, meanwhile, had a volatile session after the UK Supreme Court ruled that the government must hold a parliamentary vote before triggering the EU exit process. Crude oil prices rallied while gold snapped a three-day run of gains.

Hot topic

The dollar adopted a steadier tone as participants attempted to look beyond the “America First” tone of President Trump’s inauguration speech — although the lack of detail on promised fiscal stimulus and infrastructure spending kept the mood wary.

Sue Trinh, currency strategist at RBC Capital Markets, noted that the dollar index — a gauge of the currency against a weighted basket of peers — had now retraced more than 60 per cent of its Trump election win-inspired rally.

On Tuesday, the index was up 0.1 per cent at 100.30, off an early trough of 99.92, but well below a 14-year high of 103.82 struck at the start of 2017.

The dollar bounced off a near two-month low against the yen to trade 1 per cent higher at ¥113.75. The euro was down 0.3 per cent at $1.0730.

Noting that the new president had on Monday withdrawn the US from the Trans-Pacific Partnership, Ms Trinh said: “The market is reassessing the indirect economic and political repercussions of a more protectionist trade outlook under Mr Trump, who will now look to renegotiate the North American Free Trade Agreement, against his reflationary policies.”

Divyang Shah, global strategist at IFR Markets, said investors were still searching for direction.

“Markets are still at an inflection point, waiting for clarity on how the Trump administration objectives will impact the economic outlook,” he said

“We are only into the second full day of the new administration and concerns over protectionism have not had an excessively negative impact.

“Despite concerns over volatility the underlying sentiment is not toward a move back toward favouring bonds over equities; or even a reversal of the Trump Trade. Instead sentiment seems to be to use pockets of bond market strength to reduce exposure and any equity weakness to increase exposure.”

What to watch

Sterling was down 0.2 per cent against the dollar at $1.2504, after swinging between $1.2419 and $1.2545 after the UK Supreme Court’s decision.

“We do not expect this decision to soften the exit at all or slow the decision materially,” said Shaun Osborne, currency strategist at Scotiabank.

“Prime Minister May has reaffirmed her end-March goal for triggering Article 50 and [the UK opposition party] Labour has made it clear that it does not want to hold up the process.

“Importantly, the Supreme Court ruled that devolved parliaments in the UK do not need to be consulted, averting — at least for now — more constitutional headaches for the government.”

Equities

Most equity markets looked happier after their lacklustre start to the week.

On Wall Street, the S&P 500 rose as high as 2,284.63 — surpassing an intraday all-time peak set on January 6 — before easing back slightly to a record close of 2,280, up 0.7 per cent on the day.

The Nasdaq Composite also hit a record while the Dow Jones Industrial Average rose 0.6 per cent to 19,912.

The CBoE Vix index volatility index — watched by many as a gauge of stock market stress — was down 5.7 per cent in late trade at 11.10.

Across the Atlantic, the Euro Stoxx 600 index inched up 0.3 per cent, while the FTSE 100 in London finished flat, despite a 20 per cent slide for shares in BT Group.

Tokyo’s broad Topix index, which closed Monday down 1.2 per cent, lost a further 0.6 per cent in the face of the stronger yen.

In Australia, the S&P/ASX 200 rose 0.7 per cent, led by gains in the materials and healthcare segments.

Hong Kong’s Hang Seng index climbed 0.2 per cent as casino operators continued to gain on the back of Monday’s visitor numbers for the gambling enclave of Macau.

In China the Shanghai Composite Index gained 0.2 per cent but the tech-focused Shenzhen Composite index fell 0.3 per cent as caution began to take hold ahead of the start next week of the Lunar New Year break.

Preliminary purchasing managers’ indices published yesterday by Markit suggested that growth in the world’s largest advanced economies had started the year on a positive note, said Andrew Kenningham at Capital Economics.

“As such, they do nothing to change our view that global growth is likely to accelerate a bit this year.

“The immediate prospects for Japan look better than they have done for a long while. The surveys for the eurozone show no sign, as yet, that political risks or rising inflation are undermining its recovery.

“Finally, the increase in the flash Markit PMI for the US provides more evidence that the economy is in good shape at the start of Donald Trump’s presidency.”

Fixed income

Government bond prices eased back after the big gains seen on Monday. The yield on the 10-year US Treasury, which moves inversely to its price, was up 6 basis points at 2.46 per cent and the two-year yield was 4bp higher at 1.19 per cent.

The 10-year German Bund yield rose 4bp to 0.41 per cent.

Commodities

The energy and basic materials sectors outperformed on Wall Street as Brent oil rose 0.4 per cent to settle at $55.44 a barrel and copper rose 1 per cent in London to $1,867 a tonne

Gold retreated after hitting a two-month peak of $1,219.59 an ounce. The metal was down $8 on the day at $1,209.

Additional reporting by Hudson Lockett in Hong Kong

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