Advent of trade deal seen delayed, stocks start Dec positive
After a somewhat truncated week it’s back to business. US
and European markets were weaker on Friday but still notched gains for the
month of Nov – in the US it was the best month since June. And December is
starting with promise.
Asian shares are higher after stronger-than-expected factory
data from China. The Caixin PMI rose to 51.8, signalling the fastest pace of
expansion since Dec 2016. After Eurozone PMIs last week also showed promise,
it’s another tentative sign that global PMIs have bottomed. The US ISM prints
today at 3pm GMT.
Futures show European equities will open mildly higher
with the FTSE 100 seen up at 7365. US futures have also traced a move higher
from Friday’s close and may notch fresh record highs again today. However the
uncertainty over a trade deal could just keep bulls on their toes.
Markets continue to cling to hopes for a trade deal
but increasingly this looks unlikely to be agreed, signed and delivered before
year end. Markets though won’t particularly mind – they don’t look in the mood
to allow a bit of can-kicking to derail the party, albeit we do see pullbacks
along the way on headlines. As long as it can-kicking and not a complete
breakdown in the talks, then markets should remain on an even keel. But what we
still don’t know is to what extent Donald Trump’s support for the Hong Kong
protestors is a game-changer or not.
On the details of the trade deal, China seems stuck on not
only getting the US to abandon slapping tariffs on $156bn of Chinese imports on
Dec 15th but also for it to roll back existing tariffs. I’d expect agonising
over trade to continue to guide market swings, such as they are, in the coming
days. We could be in to the New Year before the phase one deal gets signed –
but delay of implementation of the Dec 15th tariffs would be enough
to keep the market contented that things are moving in the right direction.
Elsewhere, it is worth noting that the Fed is said to
be preparing a change in policy which could allow it to let inflation run above
2%. Stripping this down to its bare essentials it means even less chance of a
hike, which equity markets will enjoy.
prices have rebounded from Friday’s sell off as expectations for OPEC to extend
output curbs underpin sentiment. Friday saw a sharp fall as US output hit
a new record of 12.46 million bpd from 12.397 million bpd in August.
Despite this all is not well in US shale. WTI slumped to $55 where it
found support and was last testing the $56 level for a sign of recovery. We
remain at the bottom of the broad uptrend channel in force since the start of
OPEC this week (see OPEC preview: the first is not
always the deepest) will almost certainly extend production cuts
further into 2020. The question is whether the cartel goes deeper in an effort
to boost prices for Aramco. There are questions about how much Russia will
support – currently it is shouldering a third of the 1.2m in cuts. The role of
Russia is key, but the long and short of this is just much Saudi Arabia wants
to support its Aramco IPO. CFTC data shows smart money speculators
continuing to add to net long positions.
Elsewhere natural gas prices have started the week on the
back foot after selling off aggressively on Friday due to signs of a mild
In FX, GBPUSD is muddling around the mid-point
of the range at 1.2920. USDJPY has advanced as it builds momentum having
crossed the 109 threshold decisively. EURUSD is totally moribund…but has
firmed north of 1.10 having slipped as low as 1.09810, breaching that big
support level at 1.0990.
What else to watch this week
Polls show the Tory lead over Labour narrowing. Can Jeremy
Corbyn do it again and turn an unassailable Tory majority into a hung
parliament? Markets will be eyeing the polling data closely. Whilst Labour
has made inroads, the big picture is that the Conservatives still are in
a commanding position and should win a majority if the polls are accurate. But
relying on accurate polling is a false confidence and as we have seen before
when momentum builds in one direction, elections can throw up surprises. Latest
polling aggregator data from Britain Elects shows the Conservatives on 42.4%
and Labour on 30.9%, with the Lib Dems trailling on 14.3% and the Brexit Party
on 3.9%. Looks like Boris Johnson will give Donald Trump – in the UK for the
Nato birthday – a wide berth this week. Anything other than a Tory majority is
near term dangerous for the pound, but longer term there may be limited upside
unless such a government could work quickly on its future trade deal with the
There are just a few signs that PMI surveys have
hit the bottom and thus week will fill in some gaps. Later today is the ISM
report for the US manufacturing sector, expected 49.2 from 48.3 a month ago.
Elsewhere, the UK services PMI on Wednesday will be closely watched for signs
about the state of the UK economy as the election and Brexit approach.
The monthly US labour market is always closely
monitored, but with the Fed apparently on hold, it’s unlikely to deliver as
much volatility as it has in days gone by. Whilst running at a slower rate than
2018, US labour market strength remains intact. Last month’s report showed
nonfarm payrolls up 128k in October, well ahead of the 85k expected, whilst
there were upward revisions to the prior two months. The August print was
revised up 51k to 219k and the September number was hiked by 44k to 180k. The
3-month average at 176k against the 223k average in 2018. The revisions are
really the bright spot as it indicates August and September prints were nowhere
near as weak as we thought.
the RBA cut rates?
Markets have strongly priced in odds of no change
to interest rates from the Reserve Bank of Australia on Tuesday; but will the
accompanying statement hold any surprises? Minutes from the November meeting
showed policymakers agonised over the poor run of data and seriously considered
cutting rates. It’s widely anticipated that the RBA will cut again, but the
question is one of timing.
On Wednesday the Bank of Canada meets but is not
expected to change course. Indeed the central bank is now expected to hold
rates through to the end of 2020, according to a Reuters poll of economists.
Markets have been eyeing a cut but governor Stephen Poloz and deputy Carolyn
Wilkins have said that monetary conditions are ‘about right’ for now.