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‘Markets rally on trade deal hopes/tumble on trade war fears’ have been regular refrains of headline writers and commentators for months. The good news, for those of us who detest change, is that these should be applicable in the coming months just as much as over the last year. If you thought phase one was good, wait ‘til you see what’s coming…Trump will be able to keep markets on his leash with tweets and tirades about trade and China for months.

Maybe with the trade deal signed we can refocus on the data and, more importantly, what to the reaction function of the Fed will be to any softness in the coming months.

Nevertheless, putting a natural cynicism to one side, US equity markets made fresh record highs after the US and China put pen to paper on their historic trade deal. The Dow closed above 29k for the first time and the S&P 500 rose 0.2% to 3289.

Yes, the deal may be a bit puny for some, and there are plenty of risks ahead, but in coming to this agreement they’ve apparently averted never ending war. And doubts about the details of the deal had surfaced in recent days, so the fact it’s done is a relief. The truce will require calm on both sides to prevail and for lasting peace – a far more substantive phase 2 deal – to be reached.

Defensive sectors like healthcare and utilities led the gains on Wall St, and US bond yields were down, so it wasn’t entirely a case of risk-on. Indeed, as noted in previous commentary, there are multiple risks ahead, some of which have been crystallised by this agreement.

– what if the renminbi breaks 7 again – how does Washington respond? The provisions on the currency are far from watertight – e.g. commitments relating to fx positions don’t amount to much as they’re already published.
– when does phase 2 start and what will be its scope and ambition? A phase 2 agreement of any substance won’t be done quickly. Which means tariffs are here to stay. The Sphinx-like Mike Pence said talks on phase two had begun.
– does Trump take a hard line pre-election? With the ‘victory’ secured on paper, and tariffs still in place, Mr Trump has a free pass to threaten to walk away from the phase one deal.
– does the US turn its trade gaze to Europe?
– with tariffs staying put, what is outlook for growth or inflation? GDP probably won’t be much affected, but inflation may be different.(though inflation is the dog that didn’t bark).

Markets were also cheered by suggestions the Trump administration is working on tax cuts 2.0. Details are of course sketchy and anything of this nature would be difficult to do before the election, but markets will lap it up nonetheless.

Earnings are helping too – four-fifths of S&P 500 companies that have reported have beaten estimates. There’s a clear sense that after the lacklustre growth seen in 2019 (and Q4 will only be +1-2% at best) that there’ll be a significant pick up in 2020. After multiple expansion in 2019 drove the vast part of the stock market’s gains, it’s over to earnings to drive more gains.

Asia’s response to the trade deal has been sanguine, with the major indices flat. Global stocks just nudged a record high in the wake of the trade deal being signed. In Europe, yesterday the DAX was a touch softer while the FTSE rallied 0.3% to 7642.80.

Ahead of the open, futures indicate Europe is treading water following the trade deal signing – the key question is where do we go from here. There are many possible routes.

Data overnight showed Japanese machinery orders up 18% in November. German CPI came in as expected at +0.5% MoM, 1.5% YoY.

Inventory data yesterday sent oil for a brief tumble but WTI has since reclaimed the $58 handle and is trying to hold onto the 50% Fib level of the rally from the Oct 2018 low to the recent high, which sits around $58.30. Although crude stocks fell more than expected, the build-up of products was huge. Crude inventories dropped by 2.55m barrels for the week through to January 10th vs -474k expected. But gasoline inventories were up 6.7m barrels vs +3.4m expected. Distillate stockpiles rose 8.2m vs +1.2m expected. Rejection of the 100-day moving average at $57.30 and the doji candle formed yesterday looks bullish but the momentum remains to the downside.

In FX, it’s steady as she goes. EURUSD is stalking around 1.1140, although it did make a stab at 1.1160 as the dollar was offered amid the fall in Treasury yields. Clearance of 200-day and 200-hour moving averages seem to be snapping a two-week downtrend. Bulls need to clear the swing high at 1.11680 before a push to 1.12.

GBPUSD is starting to push north of the 1.30 level and has cleared the 50-day moving average at 1.3030 to trade close to 1.3050, although it’s still got a strong attraction to this round number, like a moth to a flame. Markets still undecided on whether a rate cut is coming this month so if the Bank does move to ease it opens up possible fresh downside towards the 1.28 region. USDJPY is just a little shy of 110 and has moved below the 200-week moving average again.

On tap today

ECB meeting minutes – looking for clues about future monetary policy from the Dec meeting. The first minutes from a Lagarde meeting could be interesting, but this was a dead meeting. Lagarde is no Draghi but she’s smart and buying herself time. She is due to speak in Frankfurt later also.

US retail sales – how strong is the US consumer? Probably still pretty strong by all accounts. Forecast +0.3%, or +0.5% for the core reading.

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