Market Recap: Global stocks climb thanks to optimism on US-China trade relations
Wall Street rallied to fresh record highs after the US and China signed their phase one trade deal. Stocks in the US soared initially when the US and China signed the deal but retreated after as investors sifted through the deal. In the phase one trade deal, China pledged to purchase at least an additional US$200bn worth of US farm products and other goods and services over two years.
China has also committed to be stricter on theft of American intellectual property as well as avoiding currency manipulation to gain an advantage for Chinese exports. The deal will also have a system in place to ensure that both sides keep within the terms of agreement. But as expected, the deal does not carry details of any of the structural reforms needed to solve the fundamental issues that started the trade conflict and did not fully rollback all the tariffs since the start of the trade war.
Goldman Sachs and Bank of America (BofA) both saw jumps in their trading revenue but did not come close to what JPMorgan or Citi posted. But Goldman fell 0.2% after reporting a bigger-than-expected decline in its bottom line due to litigation costs. BofA beat estimates for its quarterly profit but revised its outlook for the first half of 2020 downwards, pulling its stock down 1.8%. Morgan Stanley’s quarterly earnings report is set to be released next, at 4.15pm (GMT +4).
The greenback fell against most major currencies as risk of a global economic slowdown was reduced thanks to the phase one trade deal.
Safe haven assets climbed higher as the dollar weakened. Gold gained while the yen strengthened against the greenback, likely as the value of the dollar dropped thanks to the phase one trade deal. US Treasuries gained as well, pushing benchmark 10-year yields lower for the second session in a row, to 1.78%.
Oil futures fell on Wednesday after a US inventory report showed increased supply. But oil prices look set to recover on Thursday as the newly signed phase one trade agreement detailed China's commitment to purchase an additional US$52.4bn worth of US energy supplies over the next two years. As of 4.43am (GMT +4) on Thursday, WTI crude oil futures were 0.52% higher.
Meanwhile in Asia, major indices extended gains in the morning as investors digested the details of the US-China phase one trade deal. The Nikkei, KOSPI and Hang Seng Index started Thursday’s trading session 0.18%, 0.04% and 0.11% higher. The ASX200 and Straits Times Index started the day flat but advanced later.
Important economic releases for the day ahead include the European Central Bank’s (ECB) December monetary policy meeting minutes at 3.30pm (GMT +4) and US Retail Sales Advance report for December at 4.30pm (GMT +4).
Today’s Analysis: Will the UK’s slowing economy boost EUR/GBP in the long-term?
ECB's December monetary policy meeting minutes likely to confirm expectations of unchanged policy. Today's focus will be on details of ECB President Christine Lagarde's first monetary policy meeting as president. When former ECB President Mario Draghi was reaching the end of his term, ECB officials were divided on monetary policy. Now focus will be on Lagarde's outlook and the monetary policy framework review that Lagarde has been stressing. It is likely that the meeting minutes will confirm to investors that it is unlikely for the ECB to make any changes to monetary policy this year and will allow its quantitative easing program (that started at a monthly pace of 20bn euros since November 2019) to continue through 2020 and instead will focus on the upcoming review.
During her press conference, Lagarde was cautiously optimistic of the EU's economic outlook although she did mention downside risks to economic forecasts. The meeting minutes are likely to enforce this as well since the changes in forecasts are mostly minimal, having little effect on the euro as this will likely already be priced into the market.
Euro will likely rise if the meeting minutes hints at heavier emphasis on factors outside of monetary policy. The other area that investors will focus on is hints of what the monetary policy framework review will encompass. From a broader perspective, the ECB will review its objective and monetary tools. But markets will be looking for hints for what the review will mean for future policy. Lagarde has also stressed that she would like the review to touch on other topics including technological change, inequality and climate change. If the review hints that these factors are likely to be included in the review, markets will likely price in a risk premium as these factors may remove focus on the ECB's primary objective, which is price stability.
The newly signed US-China phase one trade deal may put pressure on the euro. With the phase one deal signed with China, US President Donald Trump may shift his focus to EU. The Washington Post reported this morning that Trump threatened imposing a 25% tariff on EU automobiles if Germany, France and the UK refused to accuse Iran on breaching the 2015 nuclear deal a week before the three countries formally announced their accusation on Tuesday. EU Trade Chief Phil Hogan is currently in the US to negotiate with US officials a trade deal. But a trade truce or deal between the US and the EU looks unlikely in the short-term. Trump is likely to shift his focus back to the EU to pressure them into a trade deal, similar to what happened with China.
Furthermore, with the latest plan from the US to put tariffs on US$2.4bn worth of French goods, in retaliation against a digital services tax in France that affects American tech giants such as Google, Apple and Amazon, a three-day trade meeting is unlikely to show progress. It is more likely that the EU will be pressured into retaliatory actions against the US, likely in the form of more tariffs. This will weigh on the EU’s economy more and will likely drive the euro down.
Sterling is likely to continue to be weighed down as investors price in higher probabilities for a rate cut. The British pound has declined since the start of the week thanks to weak economic data in the UK. Manufacturing and industrial production for November both suffered a bigger-than-expected decline.
The UK's inflation is also starting to show weakness, falling from 1.5% to 1.3% year-on-year in December, putting pressure on the Bank of England (BoE) to find ways to stimulate the economy. Implied probabilities for the BoE to cut rates skyrocketed since January 8th after dovish comments from BoE Governor Mark Carney and other BoE officials suggested that a rate cut later this month may happen.
We expect the EUR/GBP cross currency to be little changed on the result of the ECB's December meeting minutes, with a low level of downside risk if the minutes hints at the framework review having any emphasis on technological change, inequality or climate change. Then reports on the EU negotiations are likely to be released over the next few days. The euro is likely to face downward pressure since a trade deal is unlikely to happen between the EU and the US during the three days of talks. In the medium-term, EUR/GBP looks likely to rise as the EU economy seems to be bottoming out and as the outlook for sterling will likely be skewed towards the downside thanks to dovish comments from the BoE.