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China deal details help push US markets to new records

China deal details help push US markets to new records

European markets got off to a mixed start to the week, with the FTSE100 closing higher on the back of a weaker pound, while the rest of Europe saw some modest profit taking ahead of this week’s US, China trade meeting.

There were no such qualms from US investors with gains and new record highs across the board after the US removed China from its currency manipulator list ahead of the signing of this week’s phase one trade deal, the details of which are slowly becoming clearer, in particular with respect to policies on forced technology transfers.

Markets in Asia followed up their positive start to the week with a positive bias with the latest China trade data showing that imports rebounded strongly in December, rising 16.3%, well above expectations, with US imports of agricultural goods doing particularly well. Exports rose 7.6% after falling 1.3% in November in a sign of increased demand from the global economy.

European markets look set to pick up on this more positive tone when they open later today.   

The pound slid yesterday after the UK economy shrank by 0.3% in November while manufacturing and industrial production contracted sharply, by over 1%. While a lot of the headlines were taken up with the 0.3% contraction on a rolling three-month basis the economy expanded by 0.1% with the three months to October revised up to 0.2%, while we also saw a surprising trade surplus.

Part of yesterday’s weakness was also predicated on dovish comments from MPC member Gertjan Vleighe over the weekend, as he suggested that he could well join other Bank of England MPC members Michael Saunders and Jonathan Haskell in voting for a rate cut at the end of this month. This would also be Bank of England governor Mark Carney’s last meeting as governor and in light of recent comments by him, his parting gift could well be one last rate cut.

Central banks always seem in a rush to cut interest rates, and never in a rush to raise them, but even a one-eyed man can see that the slowdown in Q4 was a politically driven one, and there is significant scope for a rebound.

With a new stable government likely to embark on a significant new plan for the UK economy its hard to see why there is suddenly a chorus of voices to cut rates from their already low 0.75%.

It’s an important question to ask as to what problem a 0.25% rate cut resolve, at a time when there are rising concerns about banks ability to sustain their margins, and central banks elsewhere in the world are asking questions about the viability of sustained low rates at a time when global debt is rising at record levels.

It also important not to forget the UK consumer, at the moment inflation remains steady at 1.5% while wages are rising in excess of 3%. The last time the Bank of England cut rates unnecessarily the consumer bore the brunt as inflation took off in the 12 months after the Brexit referendum vote.

Monetary policy should run alongside fiscal policy in working best, which means it is surely better to wait until March when we see the latest UK budget, particularly since a survey from Deloitte showed the biggest rise in CFO business sentiment in 11 years in the wake of last months election result.

Once again it seems the Bank of England appears to be chasing shadows in its desire to remain relevant. Act in haste, repent at leisure has never been truer, yet the Bank of England appears to be gearing up to repeat previous mistakes, if it cuts this month.

In contrast to the subdued inflation outlook in the UK and Europe the latest US CPI numbers look as if they could be starting to edge higher, with the headline rate expected to jump to 2.4% from 2.1%, while core prices are expected to remain steady at 2.3%.

EURUSD – still got support at the 1.1100 area and the 50-day MA with a retest of the 1.1220 area still a possibility while above it. A move below the 50-day MA could well open up a move towards the 1.1040 area.

GBPUSD – slid below the 50-day MA before finding support at 1.2960 trend line support from the November lows. A move through 1.2950 opens up the 1 2900 area. Rebounds need to move back above the 1.3030 area to retarget the 1.3220 level.

EURGBP – yesterday’s move above the 0.8540 area has opened up the 0.8600 area, with a break targeting the 0.8790 area. The 0.8530/40 area now becomes support for any move higher. Below 0.8530 retargets 0.8470. 

USDJPY – the break through the 109.70 area and trend line resistance from the 2018 highs at 114.55, opens up the prospect of a move towards the 110.70 area. Support comes in at 109.20 as well as last week’s lows at 107.65.

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