Thought For A Day
Archives of “December 2019” month
rssEuropean shares jump on the trade deal bandwagon
Major indices closing higher in Europe
The major European markets are closed and the indices are higher after reports that a big deal was coming between the US and China.
The provisional closes are showing:
- German DAX, +0.66%
- France’s CAC, +0.53%
- UK FTSE 100, +0.98%
- Spain’s Ibex, +0.94%
- Italy’s FTSE MIB, +1.0%
In the 10 year note sector, the benchmark 10 year yields reversed higher after being lower earlier in the day, with the yield up by 3.2 basis points to 5.5 basis points.
Global Times: Trump tweet on deal could just be another trick to boost stock market
US negotiators offer to cut Chinese tariffs by up to 50% on $360B in imports – WSJ sources
Breaking report
- US would reimpose original tariff level if China fails to carry out pledges
- Would also cancel planned Dec tariffs
- US tariff offer made in recent days as both sides seek trade deal
- US asking China for firm commitments on increased US products
Aside from the ‘firm commitments on purchases’ we don’t know what the US is asking for from China. We also don’t know if it’s acceptable to Beijing. Looks like they’ve left the ball in Xi’s court but I’d assume (hope?) they already had some indication from China about what they wanted.
What’s also important to note here is that this would be a pretty substantial phase one trade deal. Lowering tariffs by 50% on $360B in imports would be a big step. The total tariffs right now are on $550B of goods with China countering on $185B billion.
It’s not clear which tariffs these might be as the US added tariffs in sequences on $34B, $200B, $300B and $125B along with some tweaks at various points. Chances are that this is mostly from the Sept 1 round of $125B. China had previously demanded the US remove these but the compromise here might have been that these stay on at a lower rate (it would be 5%) with tariffs from previous rounds being cut.
Update: The full story is out right now with a few more details
- The tariff-reduction offer was made in the past five days or so
- US side has demanded that Beijing make firm commitments to purchase large quantities of US agricultural and other products, to better protect US IP rights and to allow greater access to China’s financial-services sector
China has already taken action on Items #2 and #3. I doubt firm commitments on purchases is a deal breaker but the WSJ report notes that China has balked at firm purchases because they run counter to WTO rules. In the bigger picture, the US demanding China violate the WTO is part of the US strategy to undermine the WTO.
China says that it will maintain prudent monetary policy
Chinese state media with some messaging after the conclusion of the key economic policy meeting in the country
North Korea: It is clear that US has nothing to offer us even if talks resumed
North Korea delivers a harsh message to the US
- US has done a stupid thing by convening UN Security Council
- UN Security Council is nothing more than a political tool of the US’ interests
- We are ready to respond to any corresponding measure that the US chooses
It looks pretty clear by now that we’re going to start seeing tensions between both sides escalate again and this will be a wild card for markets going into next year.
Eurozone October industrial production -0.5% vs -0.5% m/m expected
Latest data released by Eurostat – 12 December 2019
- Prior +0.1%; revised to -0.1%
- Industrial production WDA -2.2% vs -2.4% y/y expected
- Prior -1.7%; revised to -1.8%
Factory activity is seen slumping to start Q4 and that largely mirrors the weaker sentiment seen in the German industrial sector as well. This just reaffirms the added sluggishness in the manufacturing side of things in the euro area economy towards the end of the year.
Global Times editor warns on China retaliation if US imposes December tariffs
The Chinese media is keeping up with its warning messages to Trump
The tweet from Hu Xijin reads:
“Impose tariffs, China will surely retaliate, such a trade war escalation scenario has been played several times. Washington won’t be so naïve to still believe it can crush China, will it? A trade war that doesn’t result in a trade deal will only be completely denied by history.”
It’s something similar to the message sent out yesterday here. The past two days have seen the Global Times come up with constant “reminders” to the US that if they do implement tariffs at the end of this week, it could lead to more bad blood between the two countries.
SNB leaves policy rate unchanged at -0.75%
SNB announces its latest monetary policy decision – 12 December 2019
- Prior -0.75%
- Sight deposits rate unchanged at -0.75%
- Remains prepared to intervene in markets if needed
- Risks to the global economy remain tilted to the downside
- Franc remains highly valued; FX market remains fragile
- Willing to intervene in FX market as necessary, while taking overall currency situation into consideration
- Negative rates and willingness to intervene should counteract attractiveness of the franc and ease upward pressure on the currency
- 2019 GDP forecast seen at around 1.0% (previously 0.5% to 1.0%)
- 2020 GDP forecast seen between 1.5% to 2.0%
- 2019 inflation forecast seen at 0.4% (unchanged)
- 2020 inflation forecast seen at 0.1% (previously 0.2%)
- 2021 inflation forecast seen at 0.5% (previously 0.6%)
No key changes by the SNB in their language as they continue to keep rates well in negative territory and reiterated that the Swiss franc remains “highly valued”.
Despite mounting skepticism over its negative rates policy, it doesn’t look like it will come to an end any time soon although the pressure on lenders and the public may still keep the central bank sidelined further for the time being.
That said, if trade risks materialise and the global economy suffers a more profound slowdown next year, it’s only a matter of time before they will have to step in and take action.
European pre-market: Sterling hangs on to gains to start election day
It is election day in the UK but don’t forget about the SNB and ECB too
Cable continues to sit at its highest level since March as the polling stations are about to open in the UK. Overall market movement so far today is minimal – as seen by the ranges – but the big moves came overnight after the FOMC meeting.
Fed chair Powell stressed on the need for a sustained rise in inflation before looking to hike and that precipitated dollar weakness across the board. There hasn’t been much follow through today but the dollar isn’t retracing those losses either to start the day.
Meanwhile, risk remains tepid with little change seen in US futures and bond yields. All eyes are still on Trump as market participants continue to wait on his decision about the 15 December tariffs ahead of the weekend.
Looking ahead, we have the SNB and ECB meetings to look forward to but unless either central bank has a surprise up their sleeve, the meeting decisions and communication should be relative non-events in trading today.