Weekly Market Commentary – 17 January 2020

Phase One Trade Deal May be more politically Symbolic than Economic
Markets this week cheered the completion of a Phase One trade deal between the US and China. While subsiding political tension has been a boon for markets, for most countries, it means diddly-squat. Tariffs on $120bn of imported Chinese goods have been halved, but 25% levies still remain on an extra $250bn. These won’t be rolled back until Phase Two, which is likely to happen after the US elections in November. A smart move by the White House as it puts the onus on China to maintain favourable ties, raise import levels from the US and not tamper with its currency.

For China, it’s the equivalent of being a donkey stuck in a box with a carrot dangling just out of reach, hurt by a slowing economy, tariffs and an appreciating currency. The increase of US agricultural imports to China could have an adverse impact on European and Asian (ex-China) imports to the region. For now, with both sides maintaining high tariffs, it appears that the trade deal is more politically inclined than economically significant, much to the rest of the world’s annoyance.

US: Banks Kickstart Earnings Season
Big US banks heralded the start of the earnings season this week. And despite falling interest rates making lending less profitable, both JPMorgan Chase (JPM) and Citigroup posted double digit revenues last quarter. The less rate-sensitive parts of the business, including corporate and investment divisions boosted results for both companies. That’s not to say that consumer borrowing didn’t add to the bottom line. Rising wage growth and rising house prices have led to US consumers flexing their credit muscles. Both companies reported an increase in spending and loan balances for Q4.

Not all banks had positive earnings. Wells Fargo’s saw its profits halve last quarter as the bank was forced to set aside $1.5bn for ongoing fines. The bank emerged largely unscathed from the financial crisis and was subsequently lauded as a pillar of financial stability. However, the bank’s reputation was tarnished after a cross-selling scandal in 2016 led to millions of consumers having bogus accounts opened for them without their knowledge

UK: Rate Cut Expecations Rise Amidst Weak Economic Data
Sterling fell below the $1.30 level this week on the back of noise from the Bank of England (BoE) and weak economic data. GDP growth fell more than expected for the month of November coming in at -0.3 per cent. It’s no secret that the BoE’s tone has been one of lowering interest rates if the economy doesn’t pick up. But candid comments from policy maker Gertjan Vlieghe who is willing to vote for cutting rates at the upcoming monetary policy committee meeting, helped fuel sterling’s descent. A lot hinges on December’s GDP data; should the “Boris Bounce” kick in, expectations of a rate cut in January could very well cool.

Elsewhere former BoE boss Mark Carney has been snapped up by Johnson to become the UK’s climate change finance advisor. Carney’s key focus will be changing the financial system in order to achieve the goals of the Paris agreement and help the UK transition to a net-zero emissions economy by 2050.

Eurozone: Investors Scramble for Sovereign Bonds
This week we saw unprecedented investor demand for European sovereign debt. Spain attracted the largest ever order book for a eurozone bond. Orders for the 30-year Italian government bond topped 44 billion euros and Belgium’s 10-year bond issuance raised close to five times what it was hoping to raise. Even Germany with its zero per cent yielding government bonds managed to raise an additional 1 billion euros.

Scarcity drove the bulk of the demand. Net sovereign debt issuance for the bloc in 2020 is expected to be around 188 billion euros – its lowest since the financial crisis despite the growing government debt pile. There are virtually no expectations of interest rate rises in the short term which has also been a key selling point.

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