Daily reviews

14.10.2019

US and China reach preliminary agreement, stocks surge

news

Asian stocks were mixed earlier in the week as investors were anxiously waiting another round of US-China trade talks.

  • US and China announce truce on tariffs
  • Stocks turned higher after earlier losses
  • Investors cheer progress in the trade talks
  • Dollar lower against the European counterparts
  • GBPUSD rallied on hopes for Brexit deal
  • Brent rose modestly, still needs to break $60


Asian equities

Asian stocks were mixed earlier in the week as investors were anxiously waiting another round of US-China trade talks. As Washington expanded its trade blacklist to include some of China’s top artificial intelligence firms, while China’s Ministry of Commerce said the U.S. should “stop interfering” in the country’s internal affairs, these developments clouded the outlook for the negotiations. Towards the end of the week, however, equities shifted to a bullish mode amid rising optimism over the trade talks after U.S. President Donald Trump said in a tweet Thursday that he was set to meet with Chinese Vice Premier Liu He on Friday.

As such, the Chinese Shanghai composite was up 0.88% to around 2,973.66. Hong Kong’s Hang Seng index jumped 2.32%. The Nikkei 225 in Japan rose 1.15% on the day to 21,798.87 while the Topix index added 0.88% to close at 1,595.27. In South Korea, the Kospi added 0.81% to end its trading day at 2,044.61.


US equities

Trump announces US-China ‘phase 1’ trade deal and tariff truce, with the list of the deal included China buying soybeans from the U.S., and in exchange, the U.S. will not move forward with another round of tariffs on $250 billion in Chinese goods. The additional support for stocks came from the Federal Reserve as the central bank announced that it is extending its overnight funding operations through January 2020.

As a result, US stocks marched higher on Friday, with the Dow Jones Industrial Average added more than 470 points and the S&P 500 index closed out its first weekly gain in four weeks. Meanwhile, the yield on the 10-year Treasury jumped to 1.74% from 1.65%. in individual stocks, JPMorgan Chase rose 2.7%, Bank of America climbed 2.5%, Apple rose 2.8%, and Broadcom added 3.1%.


Currencies

As risk sentiment was driving global markets during the week, the dollar was decently lower against the European counterparts and rose against the Japanese yen as risk sentiment improved amid progress in the US-China trade talks. On the other hand, despite the trade truce, Fed rate cut odds remain elevated as Fed fund futures show that odds of a rate cut in October still exceeds 70%. On the data front, U.S. consumer credit growth weakened somehow in August, small business optimism declines but remains historically high, producer prices posted the biggest decline in eight months in September, consumer prices were unchanged in September and registered the weakest reading since January while import prices rose modestly.

As for the Federal Reserve, Jerome Powell pushed back on Trump pressure and stressed the central bank’s freedom. He also announced expanding its balance sheet in response to funding issues. Boston Fed’s Rosengren said that US economy was ‘consistent with staying where we are’, Evans admitted that he wouldn’t mind another interest rate cut. Kashkari said more easing needed, but he was not sure how much. Kaplan noted that he’s open-minded about further interest rate cuts and added that he was not sure economy can avert severe slowdown. Mester highlighted that the U.S. likely to avoid a serious downturn. Meanwhile, the Federal Reserve minutes showed that policymakers are increasingly divided on way ahead despite most central bank policymakers supported the need for an interest rate cut in September. Fed policymakers at the Sept. 17-18 meeting decided, in a 7-3 vote, to lower the benchmark overnight lending rate by a quarter percentage point to between 1.75% and 2%.

GBPUSD jumped aggressively after Johnson and Varadkar joint statement spilled over optimist around the markets as they agreed to continue their discussions. The pair extended gains to 1.27 on Friday, where the 200-DMA lies amid further Brexit headlines. The latest bullish wave was due to the European Council President Tusk’s optimistic remarks, hopeful of a probable Brexit deal after an important meeting between the EU’s Chief Brexit negotiator Barnier and UK Brexit Secretary Barclay. However, on Monday, the pair retreated below 1.26 as Brexit hopes started to abate.


Commodities

December Brent crude added 3.7% on a weekly basis, with prices accelerated the rally in the second half of the week. The US-China partial agreement which could lead to a truce in the trade war provided a boost to risky assets including oil. Earlier, the market was supported by the news of an explosion on an Iranian tanker, which sustained damages after being hit by missiles that were launched from the Saudi Arabian port of Jeddah.

In its monthly report, the International Energy Agency said it expects global demand growth of 1 million barrels a day in 2019 and 1.2 million barrels a day in 2020. IEA attributed the downgrades of nearly 100,000-a-barrel-a-day from previous estimates for demand that has shaped up to be the weakest since 2016, following evidence of a slowdown in several major consuming regions and countries, including Europe, India, Japan, Korea and the U.S. Earlier, the Organization of the Petroleum Exporting Countries, in its monthly report, trimmed its forecast for 2019 world oil-demand growth. Meanwhile, Baker Hughes on Friday reported that the number of active U.S. rigs drilling for oil rose by two to 712 this week. That followed declines in each of the last seven weeks. As a result, Brent recovered from weekly lows around $57.36 to the $60.60 area. On Monday, the futures are retreating, with Brent has got back below the $60 psychological level.