(26 JANUARY 2019)WEEKLY MARKET OUTLOOK 2:Market Waiting For Proof As Optimism Floods

Markets have been closing in positive territory las week, as investors have been meticulously watching communications relating to US and China trade progress. The positive feedback made by US President Donald Trump that an agreement can be reached, before a second salvo of import duties knocks at the door, has given good reasons for financial markets to rise, although US Commerce Secretary Wilbur Ross statement that a trade deal is still “miles away” tends to moderate the former. Indeed, as trade duties should be implemented in the coming 34 days under current trade truce conditions, it is becoming crucial that both China’s Vice Premier Liu He delegation and Washington stay committed to reach a deal before official deadline of 1. March 2019. However, despite expectations, it seems that a rapid resolution on topics including trade gap, technology transfer and industrial subsidies is becoming impractical. Instead, both parties are rather heading towards a formal engagement that includes a road book specifying deadlines to resolve specified issues over time. We would therefore conclude that an extension of the due date is most likely. In any case, a soft resolution of the issue would necessarily support both economies, which are facing headwinds on the front of economic growth. The recent initiative from the Public Bank of China (PBoC) to set up a new monetary stimulus called the “central bank bills swap” consisting of a swap of perpetual bonds with PBoC bills, a measure that should allow commercial banks to extend more credits to the Chinese economy, clearly shows that Chinese authorities are not willing to reduce their effort to support the slowing economy. Recent suggestions are even pointing to weaker growth target set by Beijing for 2019, although a positive scenario in current trade dispute could actually have a different impact on the economy. Accordingly, the balance in USD/CNY remains hard to say, since both a negative or positive deal would either favor a drop in CNY for fundamentals reasons while a positive would tend to say the opposite amid improvement in risk sentiment. We would therefore monitor carefully trade talks, officially starting on 30. January 2019, to get a clearer picture.

By Vincent Mivelaz