US equities rallied yesterday, ahead of the signing of a “Phase One” deal between the US and China, with the S&P 500 and DJIA hitting new all-time highs. That said, at the time of the signing, we saw a small “sell the fact” reaction, as this may have been largely priced in. Now, focus will turn to talks surrounding the second phase, with the US Vice President saying that the discussions have already begun.
The dollar traded lower against all but one of the other G10 currencies yesterday. It underperformed the most against NZD and CHF, while the currency that failed to eke out any gains against the greenback was JPY, with USD/JPY found virtually unchanged this morning.
The performance in the FX world does not paint a clear picture with regards to the broader market sentiment. The weakening of the yen points to increased risk appetite, but the strengthening of the franc suggests otherwise. Maybe the franc stayed supported following the US’s decision to add Switzerland to its watchlist of currency manipulators, something that may have prompted traders to test how high they can drive the currency before the SNB decides to act. The performance in the equity sphere was mixed as well. Most major EU indices pulled back ahead of the ceremony for the signing of the US-China “Phase One” deal, while after the signing, US indices closed slightly positive, with both the S&P 500 and DJIA hitting new record highs ahead of the ceremony. As for today, Asian bourses were mixed, with Japan’s Nikkei 225 gaining 0.07% and China’s Shanghai Composite losing 0.52%.
It seemed that sentiment peaked ahead of the signing ceremony, with the actual signing triggering a small “sell the fact” reaction, as all this may have been largely priced in. Under the deal, China will increase purchases of US goods and services by USD 200bn over the next two years, while the US will roll back some tariffs. However, it will keep 25% on USD 250bn worth of goods, and China will leave in place retaliatory tariffs on over USD100 bn US imports. The fact that the agreement does not fully eliminate tariffs, and that there was no progress on fundamental problems like intellectual property, may have also been reasons for the checked market reaction.
Now all the attention will fall on negotiations surrounding “Phase Two”, with Vice President Mike Pence saying that discussions have already begun. The willingness of the world’s two largest economies to continue towards fully resolving their differences could allow market participants to add to their risk exposures. Equities and risk-linked currencies, like AUD and NZD, could gain, while safe-havens could be abandoned. The exception could be CHF for the reasons we already mentioned. We prefer to exploit and potential AUD and NZD gains against JPY, who appears to have been maintaining its safe-haven status.
Having said all that though, we are still reluctant to call for a long-term recovery and we prefer to take things step by step. Given that there are still major issues to be resolved in the “Phase Two” trade saga, we maintain the view that the road towards a final accord may not be “paved with rose petals”. What’s more, the US now appears ready to turn its tariff guns against the EU, with a report noting yesterday that the Trump administration could impose a 25% rate on EU autos if the UK, France and Germany do not formally accuse Iran of breaching the 2015 nuclear deal. The upcoming US elections and the Brexit transition period may also add to the element of uncertainty.
Overall, the Euro Stoxx 50 index continues to balance above two of its upside lines: a medium-term tentative one drawn from the low of October 2nd and a short-term one taken from the low of December 3rd. This morning, we can see that the cash index is already testing the shorter upside line. If that line continues to hold, we could see the bulls stepping in again. But even if it breaks, still, the buyers could have a chance to try and take advantage of the lower price near the medium-term upside line, hence why we will stay bullish for now.
If the bulls are able to take control near the shorter-term upside line, this could result in the index traveling back to the 3779 barrier, which is yesterday’s high. If that barrier is just seen as a temporary obstacle, its break may clear the path to the 3808 obstacle, a break of which might send the price further up and aim for the 3835 zone, marked by the highest point of 2015.
Alternatively, if the shorter-term upside line breaks, the bulls still have an opportunity to take control near the aforementioned medium-term upside line. That said, if that one fails to withstand the bear pressure as well and the price slides below the 3708 obstacle, this could spook the buyers from entering any time soon and the sellers may continue dominating the arena for a while more. At the same time, the Euro Stoxx 50 would be placed below its 200 EMA on the 4-hour chart. This is when we will aim for the 3673 hurdle, which if breaks might open the door for a move to the 3623 level, marked by the low of December 10th.
After pushing back above its 200 EMA on the 4-hour chart, AUD/JPY made a good move up, and it seems that the pair is now trying to get back to the highest point of December, near the 76.54 hurdle. But from the beginning of this week, the rate is stuck in a small range, roughly between the 75.58 and 76.10 levels. For now, we will take a cautiously bullish approach and wait for a break of the upper bound of the above-discussed range, before examining a possible further uprise.
If eventually we see a break of the 76.10 barrier, which is also the current highest point of this week, this might open the door to some higher areas. We will then aim for a test of the 76.43 hurdle, or even the 76.54 zone, marked by the highest point of December. Initially, the rate could stall around there, or even correct back down a bit. If AUD/JPY continues to balance above the 76.10 area, this may help the bulls to regroup and enter the field again. If this time the 76.54 obstacle fails to provide good resistance, its break may lead to a move to the 77.09 level, marked by the high of May 10th.
On the downside, a drop below the lower end of the aforementioned range, at 75.58, could clear the path to some lower areas. The first that we will examine will be the 75.27 hurdle, which is the inside swing high of January 6th. If the selling doesn’t stop there, a further slide may lead the rate to the 74.95 level, marked by the low of January 9th.
During the European day, the ECB releases the minutes from its latest policy meeting. Given that there was no major shift in policy, neither in language, at that meeting, we don’t expect the minutes to result in any fireworks. However, it would be interesting to see whether other members share Lagarde’s view that there are signs of stabilizing in growth slowdown.
As for Thursday’s data, Germany’s final CPI for December is coming out and as it is usually the case, it is expected to confirm its preliminary estimate. Later in the day, we get the US retail sales for the month. Headline sales are expected to have accelerated somewhat, to +0.3% mom from +0.2%, while the core rate is forecast to have risen to +0.5% mom from +0.1% in November. Following the acceleration in December’s headline CPI, decent prints could encourage investors to push back the timing of when they expect the Fed to deliver another quarter-point cut. According to the Fed funds futures, such an action is almost fully priced in for November. Initial jobless claims for last week are also coming out and expectations are form a small increase, to 216k from 214k.
As for tonight, during the Asian morning, we have China’s GDP for Q4, as well as fixed asset investment, industrial production and retail sales, all for December. The yoy GDP rate is expected to have remained unchanged at 6.0%, while fixed asset investment is forecast to have grown 5.2% yoy, the same pace as in November. Both industrial production and retail sales are expected to have slowed to +5.9% yoy and +7.8% yoy, from 6.2% and 8.0% respectively.
We also have two speakers on today’s agenda: ECB President Christine Lagarde and Fed Board Governor Michelle Bowman.
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