Trade developments continue to percolate with China appearing to try and ease the impact of the war by exempting a set of U.S. goods from 25% tariffs put in place a year ago. The exempt products did not initially consider agricultural goods but ranged from pharmaceuticals and fish food to pesticides; later a Chinese paper encouraged firms to buy U.S. farm products. As a response, President Trump decided to delay the imposition of 5% extra tariffs by a couple weeks. In tandem with the tariff reprieve news, the U.S. budget deficit for fiscal 2019 swelled to over $1 trillion through August. On the European front, ECB President, Mario Draghi, announced a reduction of its key deposit rate to -0.5% but with a tiered structure not making all reserves subject to this rate. The ECB will also restart bond purchases, a program known as Quantitative Easing, at the rate of $20 billion per month.
Risk assets across the globe rose as easing trade tensions calmed potential recession fears to an extent. Major U.S. indices have rebounded through September after a volatile August to return, in the case for small caps, 5% this week and large caps 1%. International developed stocks gained on the heels of the ECB rate and stimulus announcements. The yield curve has moved notably higher from a month ago and this week saw the highest advance in yields for six years. Market participants are expecting the Federal Reserve to cut interest rates for the second time this year at next week’s policy meeting; however, this expectation has subsided some over the past week.
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