Morning Markets Brief 12-13-2019

Summary and Price Action Rundown

Global risk assets posted robust gains overnight as headlines indicate impending resolution of the Phase One US-China trade deal and the decisive Conservative win in yesterday’s UK election cleared the path for an orderly Brexit. S&P 500 futures point to a 0.4% higher open, which would add to yesterday’s 0.9% gain and set a new record peak for the index.

Yesterday’s developments on the US-China trade front and in UK politics are crystalizing the positive scenario for global risk assets that had increasingly become the base case for investors in recent months, while global central banks have reaffirmed their accommodative monetary settings (more below). Equities in Asia rallied robustly overnight and EU stocks are up over 1% in midday trading. After moving sharply higher yesterday, however, the yield on 10-year Treasuries is holding at 1.89% this morning, remaining in its tight recent range and not even at a one-month high despite all the upward catalysts. Meanwhile, the dollar is declining to multi-month lows on the strength of the pound and the euro due to newfound certainty on Brexit. Oil prices are moving above their 6-month trading range, with Brent crude topping $65 per barrel.

Phase One US-China Trade Deal Reportedly Nearing Completion

After months of wrangling, rhetoric, and intrigue, headlines yesterday indicated that the widely-anticipated interim trade deal has been finalized “in principle” between US and Chinese negotiators but investors still await confirmation from Beijing. This latest trade-driven rally was kicked off by President Trump yesterday morning with a tweet that a “BIG DEAL with China” is “VERY close.” Subsequent reports indicated that the US had offered China 50% rollback of existing tariffs on $375 billion of Chinese imports and cancellation of this Sunday’s scheduled duty increases on $160 billion of more consumer-facing products. For its part, China is reportedly committing to significant US agricultural purchases, though Beijing has remained virtually silent on the purportedly finalized deal. Some state media outlets yesterday continued to focus on the Chinese negotiators’ goal of full US tariff rollback. Additionally, reports have indicated that ongoing enforcement procedures, such as the right to re-impose tariffs in the case of non-compliance, as well as language on intellectual property protection and currency management may also be featured in the text, although those are expected to be relatively soft commitments. The White House has insisted that a Phase Two deal will tackle these and other more substantive issues in the US-China economic relationship, but analysts are doubtful that any significant negotiations on that front are likely ahead of next November’s US election.

Resounding Election Win for UK Conservatives Sets Up Brexit in January

UK equities and the pound are surging today as the decisive election result dispels uncertainty over domestic politics and clarifies the outlook for finalizing Brexit by the January 31st deadline. The Conservative Party dramatically outperformed expectations in yesterday’s UK general election, taking 364 of 650 seats in the House of Commons, the largest majority since 1987, versus 203 seats for Labour. This represents a pick-up of 47 seats for the Conservatives and a decline of 59 seats for Labour. Analysts now anticipate that Prime Minister Johnson will use his renewed mandate to swiftly finalize the UK’s orderly exit the EU in January as well as arrange a fiscal stimulus package to spur the domestic economy. He is also expected to pursue a trade deal with the US, which President Trump eluded to in his congratulatory tweet. Additionally, investor concerns over a potential leftward shift in UK politics spearheaded by Labour Party leader Corbyn have been put to rest. The pound, which has acted as a barometer for the fortunes of Brexit, is soaring 1.7% to a nineteen-month high versus the dollar and is now up 11.2% from its August low. Meanwhile, the more domestically-focused UK equity index, the FTSE 250, is outpacing the more internationally-oriented FTSE 100, with gains of 4.1% versus 1.8%. Yields on UK sovereign bonds are relatively steady, however, and futures markets still assign some odds of a rate cut by the Bank of England next year and no chance of a hike.

Additional Themes

Fed Liquidity Taps Open – With market participants still attuned the risks of tightening liquidity in short-term funding markets into year-end, the Fed announced another enhancement to its cash-injection operations for a total of $490 billion on offer over the coming weeks. Analysts believe that banks are unlikely to take up the full amount but given uncertainties in the market, Fed officials are intent on easing concerns of undersupply of funds.

US Retail Sales Data in Focus – After a series of somewhat mixed US economic data this week, including a firmer November Consumer Price Index (CPI) reading, a softer November Producer Price Index (PPI) print, and an upside surprise in last week’s initial jobless claims, analysts will parse this morning’s highly-anticipated release of US retail sales data for November. Economists expect continued reacceleration of consumer activity after the surprisingly weak September reading, with the month-on-month pace forecast to rise to 0.5% versus 0.3% in October.