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Markets rebounded Wednesday as investors deemed the reaction to Italy’s political turmoil as overwrought. The case for the PBOC to cut its reserve ratio again is getting stronger. And China PMI figures highlight a busy day for economic data in Asia. Here are some of the things people in markets are talking about.

Markets Bounce Back

Stocks rebounded along with Treasury yields Wednesday as concerns over Italian contagion eased. The dollar dropped and oil climbed. The S&P 500 recovered all of its losses from Tuesday, and then some, as U.S. 10-year yields pushed above 2.85 percent, boosting financial shares. West Texas crude surged above $68 a barrel, lifting energy companies. In Europe, Italy’s 10-year yield fell as much as 32 basis points after the country successfully passed a key test of appetite for its debt and as politicians made a last ditch attempt to form a government. The euro rose, as German jobs data topped estimates and strong CPI readings across Europe added to the positive sentiment.

A (White) House Divided

White House trade adviser Peter Navarro criticized Treasury Secretary Steven Mnuchin for declaring the U.S.-China trade war was on hold, calling the remarks an “unfortunate sound bite” and acknowledging there’s a dispute that needs to be resolved. The remarks from Navarro, a hard-liner on President Donald Trump’s trade team, come just days before U.S. Commerce Secretary Wilbur Ross is scheduled to meet with his counterparts in Beijing to discuss ways to reduce the U.S. trade deficit. Earlier, China hit back at Trump’s plan to push ahead with tariffs on $50 billion of Chinese imports despite a recent truce in the trade fight, saying the flip-flop damages America’s standing.

Another Reserve Ratio Cut?

The case for the People’s Bank of China to cut the amount of cash lenders are required to hold is getting stronger. Chinese banks racked up 2.93 trillion yuan ($457 billion) in medium-term loans extended by the PBOC scheduled for repayment during the rest of 2018. That has prompted some analysts to raise bets the PBOC may soon repeat a tactic used in April: cutting the Reserve Requirement Ratio to hand lenders liquidity so they can pay back the debt. Even though the one-percentage-point cut in April has already eased part of that repayment burden, more than 80 percent of the original MLF funds are still outstanding -- and other pressures make the matter urgent. Lenders also need to hoard cash for upcoming quarterly regulatory checks, pay back the 2.3 trillion yuan of short-term interbank debt that Bloomberg calculations show is due in June, and put aside cash for the tax season in July.

Bill Gross’s Very Bad Day

Bill Gross had his worst day in almost four years Tuesday. But for other bond managers, it was more like Christmas in May. The steep slide in Treasury yields triggered by fears that Italy might leave the euro sent Gross’s $2.1 billion Janus Henderson Global Unconstrained Bond Fund down about 3 percent Tuesday, making a bad year even worse. Other prominent funds recorded their biggest one-day gain since 2009. Gross has struggled in 2018. His fund is down 5.9 percent for the year, trailing 96 percent of rivals, according to data compiled by Bloomberg. The fund had an effective duration of minus 4.6 years as of April 30, meaning it would profit when interest rates rose and suffer if they fell.

Coming Up...

With Italy turmoil subsiding, Asia traders will be keen to focus on some key regional economic data Thursday. China PMIs, industrial output for South Korea and Japan, as well as Thai trade highlight a data-heavy day as May winds down. Asian equities are poised to cap another monthly decline, and every Asian currency except the yen has weakened since April 30.

What we’ve been reading

This is what caught our eye over the last 24 hours.

• Tensions are rising between the U.S. and China ahead of Asia’s biggest security conference this week.
• Bitcoin is heading for $7,000.
• Tesla’s Model 3 got the nod from Consumer Reports after its brake fix.
• Airbnb is going it alone in China.
• Italy isn’t Greece – but that might not be a good thing.
• This hedge fund manager called out JD.com for “silly” deals and overvalued stock price.

--With assistance from Garfield Clinton Reynolds.

To contact the editor responsible for this story: Boris Korby at bkorby1@bloomberg.net

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