Finally. the US stock market has ended higher for the second day running.

Hopes that America will delay imposing tariffs on cars from Europe and Japan, and a bit of optimism over the Chinese trade war, pushed markets higher.

Investors either overlooked some rough economic data (falling US retail sales and factory output), or concluded that this reduced the chances of interest rates being hiked soon to cool the economy.

The news that Germany has returned to growth might have helped too.

Here’s the situation as the closing bell rang out:

• The Dow Jones Industrial Average: UP 119.81 points, or 0.47%, to 25,651.86,
• The S&P 500: UP 16.73 points, or 0.59%, to 2,851.14
• The Nasdaq Composite: UP87.65 points, or 1.13%, to
• 7,822.15.

Goodnight! GW

German carmakers roared to the top of the Frankfurt stock market today.

BMW gained 3.1% and Daimler rose by almost 3%, on relief that America might not impose new car tariffs for another six months (and may not ever?,....)

Technology companies are leading today’s Wall Street rally.

Alphabet (Google) is one of the top risers on the S&P 500, up over 4%, with Facebook (+3.3%) and Twitter (+3%) also standing proud on the leaderboard.

Tech stocks usually move inversely to investors’ level of panic over the US-China trade talks, so this shows some confidence returning.

Steven Mnuchin’s comments about visiting Beijing soon for fresh trade talks will be a factor.

He told lawmakers:

“My expectation is that we will go to Beijing at some point in the near future to continue those discussions.

We’re continuing discussions. There’s still a lot of work to do.”

Any procrastinator will tell you (if they can be bothered) that a problem delayed is a problem half-solved.

But if the White House does defer imposing new tariffs on foreign cars, the problem may just linger until Christmas.

The Financial Times points out:

The delay proposed by the Trump administration is merely a reprieve for officials in Brussels and Tokyo, as well as car industry executives who would be most affected by the action — because the threat of levies from Washington will remain on the table for most of 2019.

Most industry lobbyists were expecting Mr Trump to delay the imposition of car tariffs, or to announce and then suspend them, in order to avoid blowing up trade relations with the EU and Japan amid an escalation of the US’s trade dispute with China.

“You can’t fight multiple trade battles at the same time. You have to pick who your biggest enemy is,” said one former US trade official who has been following the deliberations on car tariffs.

European markets have closed higher, led by Germany.

Here’s the closing prices:

FTSE 100: up 55 points at 7,296

German DAX: up 107 points at 12,09o

French CAC: up 32 points at 5,374

Fiona Cincotta of City Index explains why:

The Dax performed an impressive turnaround this afternoon after a report on Bloomberg said that Trump was prepared to push back the decision on imposing tariffs on EU auto imports for 6 months. This was music to the ears of German car makers which shot higher, boosting the Dax. The euro also advance on the news (and weak US retail sales), which briefly overshadowed signs of trouble brewing in Italy.

Concerns of a renewed showdown between Italy and the European Union are unnerving investors. Italian bonds and stocks fell southwards a day after Italian Deputy Prime Minister Matteo Salvani stoked tensions by saying that he would be prepared to see the deficit rise above the EU’s limits if employment levels improved.

Wall Street is pushing a little higher, with the Dow up 115 points at 25,647 points, a gain of 0.45%.

The tech-focused Nasdaq is up nearly 1%.

Holding off on new US car tariffs would be particularly good news for Germany, on top of its return to growth this morning.

German car sales - a key part of the economy - would suffer from new tariffs on the US border. America is due to make a decision by Saturday, although a delay now sounds likely.

It would also avoid escalating the trade dispute with the EU, which planned to hit America with levies on $23bn of goods.

Ahha:

The US stock market has also shaken off its early losses, as traders welcome the news that America will resist new tariffs on cars.

US treasury secretary Steven Mnuchin is testifying on Capitol Hill now.

He’s told lawmakers that he expects to visit Beijing soon for more trade talks - a sign that the negotiations aren’t dead in the water yet.

But Mnuchin also cautions that there’s lots of work to do to reach a trade deal (a point that’s hard to argue with, as both sides have just imposed another round of tariffs)

The surprise 0.2% fall in US retail sales last month is a worrying sign, say economists.

Andrew Hunter of Capital Economics points out that demand for clothes, computing goods was weak, as was online shopping.

The decline in headline sales values came despite a near-2% m/m rise in gasoline station sales, following the 6.3% m/m surge in prices last month.

That was outweighed by a fairly sharp 1.1% m/m fall in motor vehicle sales. Even excluding those more volatile items, however, control group sales were unchanged last month, held down by weakness in electronics, clothing and non-store retail sales

Gregory Daco of Oxford Economics is also concerned that core retail sales (stripping out volatile measures like gasoline) was weak:

Dan Alpert of Westwood Capital says this will make it hard for retailers to raise prices:

Having slumped on Monday, and rallied on Tuesday, Wall Street is expected to dip back into the red when trading begins in an hour’s time.

The US-China trade war, escalating tensions between the US and Iran, and the weak Chinese data overnight could all weigh on shares.

Brad Bechtel of financial group Jefferies explains:

It does seem the trade war tensions are going to be here to stay for the time being and you have rising tensions in the Middle East with drone strikes and issues in the Strait of Hormuz etc. There is talk of more sanctions on Hungarian citizens in the wake of Trump’s visit with Orban and that just illustrates the tug of war going on in Eastern Europe as China and Russia continue to assert themselves with member countries of the Belt and Road [China’s huge infrastructure spending project].

The talk last night was around the soft data out of China and some of the rest of the region and the narrative became that China would likely provide more stimulus as a result which should be good for asset markets.

But it’s not always as simple as that. Bechtel adds:

The bad is good scenario for why risk assets should rally on poor data. The problem with that narrative is that it works until it doesn’t. If the data becomes so bad that stimulus isn’t going to be enough to rescue it then the house of cards falls apart. Speaking mostly of equity prices and the reaction function to negative data, not about China as a whole. I am not a China is going to implode type of guy, I actually think they will hold in just fine albiet at a lower level of growth. My point is more that we are in for a rocky ride.

The pound is weakening today as traders brace for another instalment in Britain’s least favourite saga - Brexit.

Sterling has shed a third of a cent against the US dollar to $1.287, a three-week low, after the government confirmed it will bring its Withdrawal Deal back to parliament again.

This will give MPs the chance to reject it for the fourth time, given the lack of progress in the cross-party talks between the Conservative government and the Labour opposition.

Bad news for Germany....Allianz economist Katharina Utermöhl fears that growth will soon fizzle out, unless there is a trade war breakthrough.

She predicts that the economy “is likely to lose momentum” in the months ahead, having bounced back in the last quarter:

In view of the difficult global environment, a V-shaped recovery in industry is not on the cards and domestic demand is likely to slow without tailwind from foreign trade.”

Back in Germany, police, prosecutors and tax investigators have launched a series of raids today, looking for evidence of tax fraud.

The probe is centred on Deutsche Bank, and allegations that some wealthy customers hid money in offshore companies.

According to Bloomberg, eight suspects’ homes were raided, along with offices of more than 20 banks, tax advisers and asset-management companies.

The Financial Times has more details:

German criminal prosecutors, police and tax investigators this morning began raiding eleven German lenders looking for evidence of suspected tax fraud by clients of a former Deutsche Bank offshore unit.

The raids are taking place in Frankfurt and six other cities across Germany and involve officers from the Federal Criminal Police, the Hamburg State Office of Criminal investigation and six different regional tax authorities. Eight individuals who were clients of a British Virgin Islands-based former Deutsche Bank unit are in the crosshairs of the investigators.

Deutsche Bank has tweeted about the raids, saying its offices are not among the ones searched:

President Xi also told his fellow Asian leaders that countries shouldn’t dictate to each other -- another jibe at America’s foreign policy approach?

“Exchanges and mutual learning among civilizations should be reciprocal and equal.

They should be diversified and multidirectional, rather than compulsory or coercive. They should not be one-way.”

Nancy Curtin, chief investment officer of Close Brothers Asset Management, has welcomed the pick-up in eurozone growth last quarter.

“Growth in the EU continues to beat expectations, proving the disastrous beginning of the year to be an anomaly. While the region has a long way to go, things are looking up; the services and housebuilding sectors are doing better than expected, eurozone unemployment is at a ten year low, and wage growth is beginning to improve. This should help consumer confidence and, in turn, consumption.

However, she also warns that the US-China trade war could Europe, so governments may need to boost spending to help the economy:

The eurozone is an export-led economy, and global trade is at its weakest in a decade. Trade tensions continue to take centre stage for the world economy, looming as a circuit breaker to global recovery. Unless we reach resolution, the EU must be open to fiscal intervention to avoid a downturn.”

Employment growth across the eurozone has also picked up, in another encouraging sign for the region:

In another worrying sign, China’s fixed-asset investment growth also slowed last month.

FAI grew 6.1% year on year in the first four months of 2019, down from 6.3% in January-March alone, the National Bureau of Statistics reported.

That shows companies are cutting back on new equipment and property, as the trade war with the US hits demand.

Today’s disappointing Chinese economic data isn’t a blip.

As this tweet shows, retail sales and business investment growth have been slowing for months, while industrial production has been jittery:

European stock markets have fallen into the red this morning, despite the encouraging news from Germany.

Instead, the disappointing slowdown in China’s retail sales and industrial output growth is worrying investors, coming on top of the existing trade war jitters.

Italy’s FTSE MIB is the worst performer, down 0.7% after deputy prime minister Matteo Salvini threatened to break EU budget rules yesterday.

The French CAC and German DAX are both down 0.5%, while the UK’s FTSE 100 is basically flat.

Matthias Weber, Economist at the University of St.Gallen, also believes Germany isn’t investing enough - because it’s obsessed with balancing its budget.

Public investments in railways, roads, bridges, childcare centers, public schools, and renewable energy are much needed. Such investments could currently be made at an extremely low (even negative) interest rate and they would boost the slowing aggregate demand.

It is unfortunate that some politicians cling to an economically unsound “concept” of zero debt and therefore miss out on these investment opportunities for Germany.

Germany’s economy ministry has welcomed the pick-up in growth last quarter -- but also warned that the US-China trade war is still a key threat.

In a new report, the ministry says:

“The German economy has not yet overcome its weak phase with the good start to the year - that will only be sustainable if the external environment improves and the uncertainty particularly caused by trade conflicts decreases.”

Germany’s return to growth coincides with a rise in water levels on the Rhine river.

The Rhine suffered a large decrease in water levels last summer, which prevented some large barges from using it to shift goods. That drove up transport costs, and had a damaging impact on economic output.

Bloomberg says it was a factor behind last year’s stagnation

Europe’s largest economy barely skirted a recession last year after it took a hit from factors including disruption to automobile production and low water levels on the River Rhine transport artery. While some of those issues have faded, more pronounced protectionist measures could damp business sentiment in the export heavy nation. Thyssenkrupp on Tuesday noted a ”weakening macro environment” as it reported a drop in profit.

An escalating trade war is “very difficult for any country or economy that is highly dependent on foreign trade like Europe, and particularly Germany,” said Erik Nielsen, chief economist at UniCredit Group. “They are going to be hit more than the others, so this is the big fear.”

Germany’s welcome return to growth in the last quarter suggests that any panic about the state of the eurozone’s largest economy was overdone, argues Carsten Brzeski of Dutch bank ING.

He writes:

Today’s GDP data is balm for the soul of the German economy.

It also confirms our long held view that not all is bad in the German economy. Some of last year’s one-off factors have turned around, the German automotive industry might have seen better times but should not be written off and private consumption remains solid. In fact, the ongoing dichotomy between struggling industry and strong domestic demand continues and at least this time around ended with a positive outcome.

But... Brzeski also argues that Germany needs to boosts its investment (both by the government and by companies):

Just as weak GDP data in the second half of 2018 was not purely a result of wrong policies and business decisions or a sign that the German economic business model should be discarded, so today’s strong data is no reason for complacency.

Domestic demand has helped Germany’s economy extract itself from its recent stagnation, points out Aila Mihr of Danske Bank:

But she also points out that recent surveys of manufacturers have been gloomy, so 2019 could still be tough.

Germany’s economy ministry Peter Altmaier has hailed today’s growth figures, calling them a “first ray of hope”.

But Altmaier has also warned that the US-China trade war is still threatening the German economy.

“The international trade disputes are still unresolved. We must do everything possible to find acceptable solutions that enable free trade.”

Altmaier also called for red tape and taxes to be cut to support German firms.