11 February 2019 Issue 795
Global Market Commentary
- US: The US stock market rose in the early period of last week since the performance of many US companies was better than expected, including Alphabet, hardware company Seagate and Estee Lauder. However, the US stock market fell after Trump claiming that he would not meet with Xi Jinping before March 1 on last Thursday. For the entire week, the Dow increased by 0.17% to 25,106.33. The S&P 500 index increased by 0.05% to 2,707.88. The Nasdaq increased by 0.47% to 7,298.20.
- Europe: The corporate performance in Europe was unsatisfied and the EU has lowered its forecast on the economic growth of euro zone. Over the week, the UK’s FTSE 100 index increased by 0.73%, the German DAX index decreased by 2.45%, and the French CAC40 index fell 1.15%. The STOXX 600 index decreased by 0.46% for the week to 358.07 points.
- Asia: After Trump claiming that he will not meet with Xi Jinping before March 1 on last Thursday, the market worried about the progress of Sino-US trade negotiations again. Over the week, the Nikkei 225 index decreased by 2.19 percent to 20,333.17. The MSCI Asia Pacific Index decreased by 0.88 percent to 154.88 points.
- US: After Trump claiming that he will not meet with Xi Jinping before March 1 on last Thursday, the market worried about the progress of Sino-US trade negotiations again. The price of US Treasury bonds generally rose, and funds flowed into the bond market. For the whole week, the US 10-year bond yield decreased by 5 basis points to 2.634%.
- Europe: The Bank of England and the European Commission also issued a pessimistic report on the Eurozone’s economic prospect, investors switched their investment into the risk-averse bond market. For the whole week, the German 10-year bond yield decreased by 8 basis points to 0.086%.
- Oil: Investors worried that the demand on crude oil would decrease since the slowdown of globle economic growth and the uncertainty on the Sino-US trade war. Over the week, New York oil futures decreased by 4.60% to close at $52.72 a barrel.
- US dollar: The British pound and the euro fell since the great uncertainty on the Brexit issue. For the entire week, the Dollar Index increased by 1.107% to 96.637.
- China: After Trump claiming that he would not meet with Xi Jinping before March 1 on last Thursday, the yuan fell. For the whole week, the yuan decreased by 0.153% against the US dollar at 6.745.
- US: Trump claimed that he would not meet with Xi Jinping before the trade negotiations deadline,March 1. He also reiterated that the trade agreements must include terms on structural changes.
- U.S: The US government may be shuted down again on Friday. Negotiations on the border wall budget of Congress have broken down on Saturday, communication is stopped within Republican Party and Democratic Party.
- U.S: Daly, San Francisco Fed President, claimed that the financial condition is continuing to be tightened, so the Fed should be “patient” with the future interest rate hikes. Besides, Bullard, St. Louis Fed President, also said that the Fed should not raise interest rates again.
- U.S: Trump nominated senior Finance Minister Malpas as the President of the World Bank. Malpas said that the World Bank should invest more resources in poor countries, and the loans given to China should be reduced.
- Euro-zone: The EU has lowered its forecast on the economic growth of Eurozone. Besides, the UK and Australian central banks have also lowered their forecast on economic growth after they maintained the benchmark interest rate unchanged.
- Euro-zone: British Prime Minister Theresa May will ask the parliament to give her more time on renegotiateing the Brexit agreement in this week and she promised that the vote on Brexit will hold before February 27.
- Euro-zone: The Italian Statistical Office announced that Italy’s industrial production fell by 0.8% in December last year, which is lower than the market’s expectation of 0.4% increase.
- Japan: According to the Japanese Cabinet Office survey, Japan’s service industry index fell from 46.8 to 45.6 in January 2019, lower than the market’s expectation of 48.3.
- Japan: Japan’s Ministry of Finance announced that Japan’s current account surplus has narrowed by 40% to 452.8 billion yen in December last year, while the market’s expectation was 469.3 billion yen.
- South Korea: According to South Korea’s central bank (BOK) data, as of the end of January 2019, South Korea’s total foreign exchange reserves increased to $405.51 billion, an increase of $1.82 billion month-on-month.
|China Market Commentary|
|• Chinese Vice Premier Liu He will hold a economic and trade consultations with US Trade Representative Lighthizer and Finance Minister Nuchin in Beijing on Thursday and Friday.
• The Ministry of Culture and Tourism announced that the tourism revenue of the Spring Festival holiday this year was RMB 513.9 billion, increased by 8.2% year-on-year.
The impact of the outcome of trade negotiations on the market
For markets, the outcome of the trade talks will dominate the market in February.
This week, US trade negotiators visited China again and met with Liu He. As the 90-day negotiation period comes to an end, it is crucial to see if there will be any new progress in china-us trade relations. Different results will produce very different changes in the market.
China-US relations are not everything
Heading into the first month of 2019, China’s economic data weakened further. The forward-looking PMI has been below the boon-bear boundary for two consecutive months, indicating that China’s economic growth faces difficulties in the first half of this year. U.S. corporate results also reflect weak demand from China. Leading construction machinery and graphics chip makers both cut their 2019 outlooks due to weak Chinese demand. Both economies are already weighed down by trade tensions.
It is not just trade conflicts between China and the us that are weakening the economy. China’s deleveraging policies, Britain’s Brexit, and the U.S. government shutdown all affect the economic outlook. Even if China and the United States can reach an agreement, the negative impact of a trade war has already had an irreparable impact, especially in the supply chain and corporate investment sectors. However, the market still needs a Sino-us agreement to improve the investment climate.
Scenario analysis of trade agreements
The talks are focused on two areas: tariffs and intellectual property and technology subsidies. As a result, we expect three scenarios to emerge in March. The most pessimistic scenario is a collapse in trade talks and the us launching tariff protection. The compromise scenario is a short-term tariff agreement between China and the us that would delay negotiations on intellectual property and technology until the future. The most optimistic scenario is a long-term deal on tariffs and intellectual property.
In the most pessimistic scenario, risky assets would be sold off and money would flow into safe-haven assets. The yen will rise, long-term Treasury yields will fall and gold will rise. Instead, emerging market assets and the Australian dollar will fall, and global equity markets will record losses. The compromise scenario will continue the surge seen at the start of the year. Market indices with low valuations continue to benefit from positive investment sentiment. Investors need to keep an eye on Brexit risks at the end of march, with sterling and the euro set to be the next market catalysts. The most optimistic scenario would send markets back into hyperactivity mode and give global equities a chance to challenge last year’s highs again.
Politics first is a realistic choice
Back to the details of the negotiations, markets were overconfident about the outcome of a deal between the us and China. First, deals may be superficial and formal, and long-term investment will suffer the trauma of a trade war. Secondly, both Chinese and American leaders have a strong style, and their governing history lacks a record of giving up their core interests. It is unrealistic to expect China and America to give up future industrial leadership because of the short-term downturn.