Morning Markets Brief 12-16-2019

Summary and Price Action Rundown

Global risk assets are advancing this morning as relief over completion of the Phase One US-China trade deal continues to percolate and firming Chinese economic data adds to the upbeat market mood. S&P 500 futures point to a 0.4% higher open, which would set a new record peak for the index and propel year-to-date gains to nearly 27%.

Last week’s decisive 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 are reaffirming their accommodative monetary settings (more below). Equities in Asia were mixed overnight while EU stocks are outperforming, with the regional Euro Stoxx Index hitting a new multi-year high. Despite the diminishing macro risks and rising hopes for a reacceleration of global growth, which should be lifting longer-duration yields, Treasuries are relatively steady after last week’s back-and-forth price action, with the 10-year yield edging up to 1.85% this morning. Meanwhile, the dollar continues to soften, as the pound and renminbi have pushed to multi-month highs. Oil prices are extending gains above their six-month trading range, with Brent crude topping $65 per barrel.

Buoyant Market Sentiment Following Resolution of Phase One US-China Trade Deal

Friday’s announcement by US and Chinese officials that the widely-anticipated interim trade deal has been finalized, followed by a weekend of upbeat commentary on the deal by US officials, remains supportive of risk appetite as investors ponder the ramifications for global growth. After some lingering intrigue on Friday morning as Beijing withheld their confirmation of the deal until after US markets opened, both sides affirmed that a Phase One deal has been reached, although some final terms need to be rectified. The US agreed to 50% removal of existing 15% tariffs on $120 billion of Chinese imports and cancellation of yesterday’s scheduled duty increases on $160 billion of more consumer-facing products. But the White House will retain 25% tariffs on $250 billion of imports as leverage in the Phase Two talks, which Trump said would start “immediately,” although investors suspect that no additional agreement is likely before the November 2020 elections. For its part, China reportedly agreed to significant US agricultural and other goods purchases, though some uncertainty remains on the exact details of the commitment. Additionally, ongoing enforcement procedures are said to be included, alongside intellectual property protection, structural reforms, and currency management terms. Meanwhile, analysts noted some unresolved issues with the US-Mexico-Canada trade agreement (USMCA). Still, Congress is expected to pass the bill this week and there remains no discernable market uncertainty. For context, unlike US-China trade news, developments regarding USMCA have not been a significant driver of price action in 2019.

Mixed Global Growth Data but Chinese Figures Improve

Livelier November readings from China are helping support investor expectations for a broad rebound in economic activity in 2020, though EU and UK data showed no sign of acceleration. China’s November readings of industrial production (IP), fixed asset investment (FAI), and retail sales reflected moderate recovery from October’s dismal readings. IP bounced to 6.2% year-on-year (y/y), outpacing expectations of 5.0% and the prior month’s 4.7%, while retail sales also outperformed forecasts, registering 8.0% y/y growth versus a forecast of 7.6% and October’s 7.2%. FAI was consistent with projections at 5.2% year-to-date, matching the prior month. However, preliminary December purchasing managers’ indexes (PMIs) readings in both the EU and UK were generally disappointing. Although the EU service sector PMI edged upward to 52.4 from November’s 51.9, bettering expectations of 52.0, manufacturing relapsed deeper into contraction at 45.9, undershooting a forecast of 47.3 and the previous reading of 46.9. For context, PMI readings above 50 denote expansion in the sector. The UK PMIs were disappointing across the board, with both manufacturing and services reflecting further retrenchment at 47.4 and 49.0, respectively, versus expectations of 49.2 and 49.5. Overall, investors are still generally expecting a moderate 2020 rebound in global growth owing to the supportive dynamics of US-China trade détente and lagged effects of major central bank easing.

Additional Themes

Fed Liquidity Operations in Focus – With market participants still attuned the risks of tightening liquidity in short-term funding markets into year-end, demand for today’s $50 billion offer of 32-day term repos by the New York Fed will be scrutinized. For context, the Fed announced a boost to its cash-injection operations on Friday for a total of $490 billion on offer over the coming weeks. Analysts believe that Fed officials are erring on the side of oversupply of funds.

US Growth Figures Remain Mixed – After Friday’s disappointing reading of November retail sales, analysts will parse today’s preliminary December purchasing managers’ index (PMI) data for both manufacturing and service sectors, with both gauges expected to remain steady.