Wednesday, January 15, 2020

JPMorgan & Citi trading revenues surge; does the dollar have room to fall on Friday?

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  • China
  • Dollar
  • Gold
  • Stocks
  • Oil

Market Recap: US’ tariffs on Chinese goods looks likely to stay put until phase two

Stocks in the US ended Tuesday mixed thanks to a Bloomberg report revealing certain details of the phase one trade agreement between China and the US. Bloomberg reported on Tuesday that US tariffs on $360bn worth of Chinese goods will continue until after the November presidential elections in the US and a suspension of the tariffs will be contingent on China's compliance with the agreement.

Wall Street fell after the release of the report, as investors price in the negative impact that continued tariffs will have on global demand. US Treasury Secretary Steven Mnuchin later confirmed that tariffs would stay in place until there is a phase two agreement. The Bloomberg report also said that China would increase its purchases by approximately US$80bn on US manufactured goods, US$50bn on energy supplies and US35bn on services-related goods. 

JPMorgan Chase and Citigroup both beat earnings estimate on Tuesday while Wells Fargo earnings report was plagued with litigation expenses. Revenue from JPMorgan's Fixed Income trading desk surged 86% compared to a year earlier, contributing to a 31% increase in its corporate and investment banking unit. But the bank faced pressure from lower interest rates, although still beating analysts’ estimates to end the quarter with a net income of US$2.57 per share.

Citi's earnings per share for the quarter was US$2.15, beating expectations of US$1.84 thanks to growth in its credit card business and increased trading revenue. JPMorgan rose 1.17% and Citi advanced 1.56% while Wells Fargo dipped 5.39%. In the tech space, Pinterest spiked up 9.63% after a report showed that its estimated user base in the US grew 7.4% to 82.4mn in 2019, surpassing Snapchat to become the third-biggest social media platform.
 

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The dollar gained against most major currencies on Tuesday thanks to the possibility of the continued tariffs on Chinese goods and as inflation in the US continued to support the Fed's economic outlook. US inflation rose slightly below expectations for December to 0.2% month-on-month and 2.3% year-on-year. Core inflation remained flat as expected at 2.3%.

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Meanwhile safe havens continued to extend losses for the second session in a row. Gold fell while the Japanese yen weakened against the greenback. But US Treasuries rose, with benchmark 10-year yields declining 3bps to 1.81%.

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Asia stocks was mixed on Wednesday morning, with the majority of Asian indices looking poised for losses. The Nikkei, KOSPI. Hang Seng and Straits Times Index fell on Wednesday morning. But the ASX200 started the trading session flat and advanced later in the morning.

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Next up, expect earnings report releases from Goldman Sachs (4.30pm GMT +4), Blackrock (after the US market closes) and Bank of America (after the US market closes).

Economic releases for the day ahead include inflation rate in the UK at 1.30pm (GMT +4) and manufacturing index for January in the US at 5.30pm (GMT +4)

Today’s Analysis: Will China meet US’ demands on intellectual property rights?

Yesterday's inflation data release was slightly lower than economists' estimates but still supported the Fed's overall economic outlook. Consumer Price Index (CPI) for December rose 0.2% month-on-month and 2.3% year-on-year while the core inflation (CPI ex Food and Energy) grew 0.1% month-on-month and 2.3% year-on-year. The inflation data had little effect on the Dollar Index and was eclipsed by the latest report on the US-China phase one trade deal saying that US tariffs on US$360bn worth of Chinese imports will continue until the November elections

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The US-China phase one trade deal will likely lift pressure off global growth in the short-term but don't expect it to solve any of the fundamental issues that started the trade war. Investors will be focused on the details of the agreement and in particular will look out for areas on intellectual property protection, which has been the reason why the US started imposing tariffs on China.

After yesterday's report from Bloomberg and statement from Mnuchin, the market now expects US tariffs on US$360bn worth of Chinese imports to continue through 2020 or until a phase two agreement as well as roughly an additional US$180bn worth of purchases from China on American goods. We also expect the agreement to encompass some sort of policy on intellectual property rights in China, although it is unlikely to be a concrete one. 

While the US wants China's commitment to implement stricter intellectual property rights, China has little incentive to do so as the costs are likely to outweigh the benefits in a country that probably still has room to develop, especially in the less developed cities in China. This means that China is unlikely to be pressured into accepting change of policy demands from US. But certain policies are likely in China's interests, such as eventually opening up its domestic market to international companies and being less manipulative on its currency.

December's retail sales dataset is likely to be dragged down by auto sales, although retail sales should still be expected to be higher than November's 0.2% growth. Total vehicle sales in the US for December fell to 16.70m, i.e. a 2.28% decline from November, signalling that auto sales will likely drag on the December's retail sales data, although seasonally adjusted estimates for retail gas of a 2.8% increase should balance out the effects of declining auto sales in December.

In addition, with the thanksgiving holiday later than usual in 2019, some retail sales during the Black Friday weekend may have spilt over into December, giving a boost to December's retail sales dataset. Expect retail sales ex auto & gas to grow more than November as a result, although is unlikely to beat estimates for a 0.4% growth.

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January's preliminary consumer sentiment index estimate is likely to miss expectations thanks to the conflict between the US and Iran earlier in the month. The military actions by both countries will probably weigh on consumer sentiment as has been observed historically. The dollar is likely to suffer as a result. But the final estimate later in the month will likely rebound closer towards economic forecasts of 99.3 if the conflict between the two countries do not escalate further.

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We expect the Dollar Index to rise slightly to 97.50's level on the announcement of the phase one trade agreement as the US will likely emphasise its position in getting a phase one trade deal and pushing for prospects that US-China relations are progressing towards a full trade agreement. But on Friday, expect DXY to weaken as consumer sentiment is likely to disappoint, possibly by as much as 0.21%% on the release of the data. The greenback should remain little changed on the release of the retail sales data, unless retail sales ex auto & gas largely misses expectations. But if consumer sentiment does better than expected, the dollar is likely to end the week stronger, and will likely gain as much as 0.27% on the release of the results.