How are markets responding to the latest US-China trade developments?

Trade deal framework provides limited market catalyst

Markets offered a tepid response to Wednesday's announcement of a US-China trade framework agreement. The deal builds on last month's Geneva truce and includes measures to lift export restrictions on rare earth minerals and magnets.

However, the lack of specific details has dampened investor enthusiasm. Many traders recall previous false starts in US-China negotiations that ultimately failed to deliver meaningful progress.

A federal appeals court decision allowing President Trump's tariffs to remain pending review adds another layer of uncertainty. This development complicates the outlook for sustained trade progress.

Asian markets outperform amid cautious global sentiment

Asian equities showed resilience despite the measured global response to trade news. MSCI's Asia ex-Japan index climbed 0.5%, reflecting regional optimism about reduced trade tensions.

South Korea's KOSPI delivered the strongest performance, gaining 0.9% to reach a near 3.5-year high. Strong foreign capital inflows and expectations of pro-growth policies supported the rally. Japan's Nikkei 225 and Chinese blue chips both advanced, posting gains of 0.5% and 0.8% respectively. These moves suggest investors remain hopeful about improved trade dynamics.

European and US futures cautious ahead of inflation data

European and US futures pointed towards a cautious start to the day. The US inflation figures remain the key event of the week, and stocks have essentially drifted sideways into today's meeting.

Notably, however, the FTSE 100 has managed to reach a new record high, suggesting the index's lower valuation relative to its peers continues to drive inflows, particularly from US stocks where investors remain nervous about the higher valuations despite the rebound in sentiment since April.

Currency markets reflect trade uncertainty

The dollar index edged up 0.1% to 99.13, showing limited reaction to the trade news. This muted response underscores the market's cautious assessment of the framework agreement.

The EUR/USD dipped slightly to $1.141, while the Japanese yen held steady around 144.90 per US dollar. Major currency pairs showed little conviction in either direction following the announcement.

Bond markets await key inflation data

Treasury markets remained largely stable ahead of crucial US consumer price index (CPI) data for May. Ten-year yields held near 4.47% as investors positioned for potential market-moving inflation figures.

A $39 billion auction of 10-year Treasury notes also looms, adding technical factors to market dynamics. Bond traders are balancing trade optimism against persistent inflation concerns. Median forecasts point to a 0.2% monthly rise in headline consumer price index (CPI) and 0.3% increase in core inflation. These projections would push annual rates to 2.5% and 2.9% respectively.

Stronger-than-expected inflation readings could dampen Federal Reserve (Fed) rate cut expectations. Market pricing currently suggests a 60% probability of September easing.

Commodities show mixed performance patterns

Gold climbed 0.6% to reach $3,341.00 per ounce, benefiting from its safe-haven appeal. The precious metal continues attracting investors amid trade and inflation uncertainties. Oil prices eased slightly ahead of US inventory data, with Brent crude oil down 10 cents to $66.77 per barrel. WTI crude oil fell 4 cents to $64.94, showing energy markets' vulnerability to sentiment shifts.

UK focus shifts to spending review implications

Chancellor Rachel Reeves' upcoming multi-year spending review commands attention in UK markets. The review will allocate over £2 trillion in public funds through 2029, setting infrastructure investment priorities.

Sterling declined marginally to $1.3483, reflecting modest uncertainty ahead of the spending announcement. Currency traders are positioning for potential fiscal policy implications.

Gilt yields ticked higher as markets prepared for the government's spending plans. Bond investors are assessing the potential impact on UK debt dynamics and monetary policy.