Global equity markets had a great finish to 2019 thanks to the announcement the US and China agreed upon phase one of the trade deal.
Last week the FTSE 100 hit its highest since July, while the DAX 30 hit a 23 month high in mid-December. The S&P 500 rallied over 28% in 2019 – its best annual performance in six years.
President Trump said that phase one of the trade deal will be singed on 15 January, and even though a lot of the good news has already been factored in, it should assist with the bullish mood. Once the phase one hurdle has been cleared, traders will start to think about phase two. The second-leg of the trade deal will address trickier topics like intellectual property rights. Seeing as the first stage of the trade dispute dragged on for approximately 18 months, the next leg could last even longer – seeing as it is likely to be much complex. Mr Trump needs to show that he is standing up for American interests, but Beijing can play the long game, so the Chinese government have no incentive to meet all his demands.
Sterling had a strong finish to 2019 too on the back of the sizeable majority secured by the Conservative party in last month’s general election. The pound was given a nice boost in October when it was announced that Prime Minister Johnson managed to broker an exit deal from the EU, and the decisive electoral victory last month gave sterling another shot in the arm. The UK will leave the EU on 31 January, but then it will enter the transition period, which will last until the end of the year.
Overnight the Caixin survey of Chinese manufacturing was released, and the reading came in at 51.5, while economists were expecting it to remain at 51.8 – the highest reading since early 2017. The Chinese central bank announced the reserve requirement ratio (RRR) would be lowered by 50 basis points as of 6 January. The RRR news helped stocks in China.
Between 8.15am (UK time) and 9.30am (UK time) a number of major European economies will release their final readings of their respective manufacturing PMI reports. Spain, Italy, France, Germany as well as the UK will post their figures, and economists are expecting 47, 47.2, 50.3, 43.4 and 47.6 respectively.
The European manufacturing industry has been caught in the cross fire of the US-China trade spat. The eurozone has yet to fully recover from the debt crisis, and the uncertainty surrounding Brexit has played a role in the sector’s poor performance too.
Some people are fearful that president Trump will turn up the heat on the EU in relation to tariffs. Donald Trump will be seeking re-election at the back end of the year, and playing the American first card is likely to play well with his voter base. Even though the trade relationship with China is looking positive at the moment, in the coming months the talk from both sides could toughen up as they move on to phase two of the trade deal.
EUR/USD – has been pushing higher since late November and while it holds above the 100-day moving average at 1.1061, it might retest 1.1300. A move to the downside might target the 1.1000 area.
GBP/USD – has rebounded from the recent pullback and it seems the wider upward trend is still in play. Should the bullish move continue, it might target the 1.3500 area. A move lower might find support at the 50-day moving average of 1.2976.
EUR/GBP – remains in the wider downtrend and if the bearish move continues it might retest 0.8276. A rebound might run into resistance at 0.8544 – the 50-day moving average.
USD/JPY – while it holds below the 50-day moving average at 108.94 it could target 107.88. A move to the upside might encounter resistance at 109.72.