Financial market research and analysis

European shares are flat on Monday after a mixed session in Asia while LCG pricing points to a lower start on Wall Street.

INDICES: US removes China currency manipulator status

Wall Street has yet again reached new record highs in the lead-up to the signing of the US-China trade deal at the While House. Some of the meat of the deal is starting to emerge too. The deal covers two of US President Trump’s biggest bones of contention with China, currency manipulation and an unfair trade surplous.

The US will remove China’s status as a currency manipulator as part of the deal. The Chinese yuan rallied to a 5-month high on the news. In its latest currency report, the US Treasury noted the depreciation of USDCNY from a high of 7.18 in September to 6.93 currently, making the manipulator status no longer applicable. The US Treasury have basically put a line in the sand at 7.00 in USDCNY. Should the US dollar continue to weaken against the yuan, which we think it will, that is an additional tailwind for US export growth to China.

For their part, China has agreed to buy $80bn extra manufacturing goods and $50bn more energy supplies from the US over the next two-years as part of the phase-one deal. Services and agricultural goods will also get multi-billion-dollar boosts. The purchases represent a direct increase in economic activity and a thawing of the US-China tensions, which it is hoped will open up international trade more generally.

EQUITIES: Tech rally, Banks kick-off Q4 US earnings

Big US tech companies have been leading the gains in the latest rally, resuming their position as market leaders. Microsoft and Apple both stand to benefit from the dollar falling in value against the yuan because it lessens the cost of their products in China, which helps sales. Facebook is banned in China but its prospects of entering the market will be much improved with a phase one trade deal in place.

US banks Citigroup, JP Morgan Chase and Wells Fargo all report earnings today. Lending data out of the US suggest good times are afoot for the big banks. The US central bank lowering interest rates last year helped demand for mortgages and confidence in the economy has seen consumers increase credit card spending. The American public taking on more debt, serviced by these big lenders should offset lower corporate borrowing. Businesses have been conservative on investment since the financial crisis, choosing instead to re-invest in their own shares etc. The trade war has  exacerbated the issue, hampering the desire to make large transactions.

FOREX: Yuan 5-month high, US CPI

The decision to remove  China as a currency manipulator as part of the phase one trade deal between the US and China has sent the Chinese yuan to a fresh 5-month high. The market is looking at the removal of the currency manipulator label as a sign that China will strengthen its currency in its peg against the US dollar. One would imagine that after the signing of the deal the People’s Bank of China would look to gradually fix the yuan stronger. In doing so, the PBOC should be on the same side as the market because the signing of the phase one deal does improve China’s growth outlook, typically meaning the currency would strengthen. A Bigger than expected rise in China’s exports and imports in December have added to the yuan strength.

More broadly the US dollar is mixed as other major currencies diverge. The Japanese yen has been losing alongside its appeal as a haven, while hopes for better growth in Europe has helped the euro while the pound has been under pressure from talk of a UK rate cut.  

US inflation data is the biggest macro release of the data. US CPI for December is expected to show growth of 2.3% year-on-year, up from 2.1% previously. Core prices that strip out energy are expected to rise 2.3% y/y too, unchanged from the previous reading. Inflation just above 2% probably doesn’t meet the Federal Reserve’s requirement for a ‘material change’ but it moves us in that direction. AS USDJPY breaks 110, we’d look there for any benefits to the dollar of higher-than-expected consumer inflation.  

COMMODITIES: Gold plummets again

Oil prices are steady on Tuesday after another daily slide. Data out of China showed Chinese oil exports hit a new record last year for the 17^th year running. But it still hasn’t been enough to overcome the excess supply in the market. US gasoline stocks will likely rise again during a seasonally lower demand period in API data later today. $63 per barrel in Brent crude is level we’ve been watching where demand could reappear and ease some of the pain.

Gold has come in for another wave of selling as investors dump havens in favour of risky assets. The US conflict with Iran never materialised and the imminent signing of the phase one trade deal has got investors excited again about global growth. We still like gold short term above $1520 per oz and look at the recent fall as a healthy pullback from a 7-year peak.