Summary and Price Action Rundown
Global risk assets are fluctuating around yesterday’s highs this morning as investors pause to consolidate gains after the recent string of upside catalysts and note lingering uncertainties on US-China trade, the global economy, and Brexit for 2020. S&P 500 futures indicate a flat open, which would keep the index at yesterday’s record peak and retain year-to-date gains of around 27%.
After last weeks’ decisive developments on the US-China trade front and in UK politics, as well as yesterday’s firmer growth figures from the US and China, investors may be looking to take some profits into year-end, particularly as they note lingering uncertainties on each of these fronts (more below). Equities in Asia moved higher overnight but EU stocks are underperforming on idiosyncratic weakness by some major regional corporates. Treasuries are steady after back-and-forth price action during recent sessions, and the 10-year yield remains within its multi-month range at 1.86%. The dollar is steadying after its recent depreciation, as some reemergent concerns over Brexit dent the pound. Oil prices are holding their gains to hover near their highest point in six months.
Brexit Uncertainty Rekindled by Transition Deadline
The pound is retracing its gains against the dollar since last Thursday’s decisive election win for the Conservatives as Prime Minister Johnson seeks a hard end-2020 deadline for the Brexit transition period. Reports indicate that the government’s proposed legislation would reintroduce the risk of a disorderly UK divorce from the EU by mandating that the transition period, during which a new EU/UK trade agreement is to be hammered out, conclude at the end of next year regardless of the state of negotiations. The European Commission’s Director General for Trade warned that imposition of such a deadline would risk a “cliff-edge situation” next December. The pound, which has acted as a barometer for the fortunes of Brexit, has fallen 1.1% versus the dollar following this news, reversing most of its post-election gains from last Thursday. Nevertheless, it remains close to a year-to-date high versus the dollar and retains gains of 9.7% from its August low. For context, the Conservative Party dramatically outperformed expectations in last week’s UK general election, capturing the largest majority since 1987. Analysts anticipate that Prime Minister Johnson will use his renewed mandate to swiftly finalize the UK’s orderly exit the EU in January, arrange a fiscal stimulus package, and set to work on the trade deals with the EU and the US to realign the UK’s post-Brexit international commerce arrangements. Meanwhile, recent UK economic data has been weak (more below).
Global Growth Questions Persist Despite Firmer US and Chinese Data
Yesterday’s encouraging November readings from China and solid US data helped support investor expectations for a broad uptrend in economic activity in 2020, but evidence of a rebound remains spotty. Preliminary US purchasing managers’ indexes (PMIs) for December were generally stable and in-line with expectations, with the manufacturing and service gauges at 52.5 and 52.2, respectively, versus expectations of 52.6 and 52.0 and November readings of 52.6 and 51.6. For context, PMI readings above 50 denote expansion in the sector’s activity. A New York region factory gauge posted a slight downside miss but remained solid, while the NAHB Housing Market Index jumped to 76 in December, the highest reading since June of 1999. Meanwhile, China’s November readings of industrial production (IP), fixed asset investment (FAI), and retail sales reflected moderate recovery from October’s dismal readings. Contrasting with the upbeat readings in the US and China, preliminary December PMI readings in both the EU and UK were generally disappointing, with the manufacturing gauge for both regions relapsing deeper into contraction. This morning, readings of UK job vacancies and wage growth were softer than expected, while analysts await US industrial production and housing construction data for November. Meanwhile, consumer bellwether Unilever downgraded its sales projections, raising questions about the outlook for global demand.
US-China Trade on the Backburner – After last week’s confirmation from both Washington and Beijing that a Phase One trade deal had been finalized, except for some rectification of the wording, markets are not reacting to headlines overnight from state-linked media that some Chinese officials doubt their ability to meet the import commitments in the agreement.
Fed Liquidity Operations in Focus – Yesterday’s $50 billion offer of 32-day term repos by the New York Fed was oversubscribed even though analysts believed that Fed officials were erring on the side of oversupply of funds. For context, in order to head off another bout of funding market tightness as witnessed in September, the Fed announced a boost to its cash-injection operations on Friday to total $490 billion on offer over the coming weeks, while the ongoing Fed balance sheet expansion of $60 billion asset purchases per month, which is designed to provide more lasting liquidity, is set to persist at least into the second quarter of next year.