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Shanghai shares rally, yuan firms after China, U.S. pause trade war


By and Noah Sin

SHANGHAI/HONG KONG (Reuters) - Chinese shares, commodities and the yuan currency jumped on Monday while bond futures fell after Chinese and U.S. leaders agreed to a temporary truce in their bitter trade war.

The deal between U.S. and Chinese postponed a U.S. tariff hike that had been slated for Jan. 1 which would have marked a massive escalation in the trade dispute.

But analysts cautioned it may have only bought some time for more wrangling over deeply divisive trade and policy differences, and said China's economy will continue to cool regardless under the weight of weakening domestic demand.

China's benchmark Shanghai Composite index rose 2.8 percent and blue-chip shares surged 3.2 percent.

Government bond futures fell as shares rallied, with the 10-year treasury futures for March delivery, the most-traded contract, falling 0.26 percent at the open. It was last down 0.11 percent at 96.595.

Shares in Hong Kong also jumped, with the adding 2.7 percent and the Enterprises Index jumping 3 percent.

"This is a relief rally. The markets are oversold. I don't think we needed much of an excuse (for a rebound)," said Paul Kitney, at in Hong Kong.

The agreement "is not a ceasefire, it's just a de-escalation. The existing tariffs are still having a negative impact on the Chinese economy, they haven't gone away."

The said had agreed to buy an unspecified but "very substantial" amount of agricultural, energy, It also said the two sides would launch new talks to address issues including technology transfer, intellectual property, non-tariff barriers, cyber theft and agriculture.

The also the existing 10 percent tariffs on $200 billion worth of Chinese goods would be lifted to 25 percent if no deal was reached within 90 days.

praised the "important consensus" reached in the deal, but did not mention the 90-day deadline.

Despite the differences in the wording of U.S. and Chinese statements and uncertainty about some the details, the deal is a better outcome than many investors had expected.

"It is a positive surprise to the RMB and the stock market, which has largely priced in the no-deal case," Larry Hu, at in Hong Kong said in a note.

In onshore trade, the yuan was trading at 6.9286 per dollar at 0225 GMT, though it weakened from an opening level of 6.9278.

Its offshore counterpart firmed to as high as 6.8950 to the dollar, and was trading at 6.9204 at 0133 GMT.

"The progress in the Sino-U.S. negotiations is slightly positive for the market, and it will help revive risk appetite to support the yuan," said Stephen Chiu, FX and at Construction Bank (Asia) in Hong Kong, in a note.

But Ken Cheung, senior FX strategist at in Hong Kong, said the yuan's consolidation of earlier gains showed that the market remains "quite cautious" about the outlook for the Sino-U.S. trade relationship.

"The gap between China and the U.S. ... remains quite wide, and it is very difficult for them to reach a comprehensive deal in 90 days," Cheung said, adding that he doesn't see "much further movement" for the rebound.

Commodities also rallied on hopes of thawing relations.

Benchmark on the Shanghai Futures Exchange rallied 7 percent at one point, their best intra-day gain in nearly 14 months. They were last up 3.9 percent.

iron ore soared nearly 6 percent and was last up 3.1 percent, while coke contract leaped 7 percent when market opened, and was last up 5.5 percent.

"We are expecting China to buy more LNG, LPG, corn and soybean to step up imports from U.S," said Michael Mao, analyst with consultancy "(The) government is also likely to issue a new import tax on these products to facilitate imports."

But some analysts cautioned about reading too much into Monday's rally.

"The fundamentals haven't changed," said Ben Kwong, at KGI in Hong Kong, referring to the day's gains.

"Worries about the trade war have subsided, so investors are shifting their focus back to other things, like a stronger renminbi (or) a lower pace of rate hikes from the Fed."

China's factory activity grew slightly in November, a private survey showed on Monday, with new export orders shrinking at a faster pace and manufacturers cutting prices to counter weak domestic demand.

The downbeat readings backed Friday's official PMI survey for November which showed growth in the nation's vast factory sector had effectively stalled.

(Reporting by and in SHANGHAI and in HONG KONG; Additional reporting by and in BEIJING; Editing by and Kim Coghill)

(This story has not been edited by Business Standard staff and is auto-generated from a syndicated feed.)

First Published: Mon, December 03 2018. 08:37 IST