Advent of trade deal seen delayed, stocks start Dec positive

Morning Note

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.

Oil 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 Oct.

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 winter.

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

U.K. Election

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 EU.

PMIs turning? 

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. 

Nonfarm payrolls

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.

Will 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.

Bank of Canada

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.

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