Europe lower as US-China trade deal nears completion
Game on: a phase one deal is ready to be signed, we’re just not that sure what’s in it. Sentiment turned risk-on after the US said it will remove China from its list of currency manipulators. US-Iran tensions simmer but have taken a back seat. Europe is off to a softer start though after a mixed bag overnight in Asia.
A commitment by China not to engage in competitive
devaluations is expected in the trade agreement document to be signed this
week. In short term, it’s almost there – the news is good.
But just because the US is removing the currency manipulator
tag from China don’t mean it can’t talk tough on trade later on – how will it
be seen if the renminbi depreciates again? Again, enforcement is the problem.
And with the election now heaving into view, and a phase one deal complete,
there will be pressure to take a hard line with China with regards any future
deal and concessions. This is a truce, not a peace treaty.
Moreover, one final doubt that will keep investors waiting
and watching – we don’t as yet know all the details of the deal. According to
Politico, it will include provisions for China to buy more US energy and
manufactured goods totalling $200bn over two years.
It’s been a tentative start to trade in Europe, with the major indices selling off on the open, although investors ought to be buoyed by trade optimism and fresh records on Wall Street. Asia has been mixed and a little lacklustre overnight, although the ASX has pushed higher following a 17.7% leap in Chinese imports (exports +9%).
The S&P 500 rallied 0.7% to close at a
new record 3,288.13. The Nasdaq also broke new ground, up 1% to 9,273.93. The
Dow rose 83 points to close just a little above 28,900. 29k is in view again,
this time for more than a brief minute.
The standout performer was Tesla, which breezed past
$500 and carried right on to $524, a near 10% gain on the day. Short covering
is helping to lift shares. It’s fair to say shorts are being crushed and there
is still a sizeable portion of the free float out on loan – could $600 before
We’ve felt the risk-on trade in FX too as USDJPY has
broken clear of key multi-year resistance to hit 110 for the first time since
May last year. The breach of the 200-week moving average around 109.70/80,
following a move clear of the descending trend line and clearance of the
200-day moving average around 109.50/60 sets up a move towards 112.
GBPUSD is struggling to keep its head above 1.30 and
was at 1.2960. Sterling is offered as the market aggressively reprices the
likelihood of the Bank of England cutting rates this month.
EURUSD stalled at 1.1140. This rally off the
lows since September is proving a long hard slog but the bullish is just about
US CPI inflation data is the chief eco release to
watch. The Fed has made it very obvious it’s not bothered if inflation rises. A
weak reading only judges the Fed to cut again, whilst a string printer
justifies (in the Fed’s eyes) the decision to cut last year. CPI MoM for
Dec seen at +0.3%, flat from the previous month, with core at +0.2%. This would
equate to year-on-year inflation of 2.4%, up from 2.1% the previous month, with
core seen steady at 2.3%.
The US move remove China from its currency most wanted list
scrubbed another $10 off gold, with prices now moving around $1540.
Oil remains in a downward spiral. Bulls failed to
defend $59 and were now testing the $58 support level coinciding with the 50%
retracement of the move up off the lows since Oct 2019. For all it’s worth it’s
got a $55 handle written on it.