21 January, 2019
Investor appetite to risk remains on the rise today, with equities in green across Asian markets. The slowdown in China’s economy will not impact this sentiment much unless a negative update on U.S.– China trade negotiations is received. Although U.S. President Donald Trump denied reports indicating that U.S. tariffs on Chinese exports would be lifted, he said over the weekend that there has been progress towards a deal with China. Despite the complex situation, it seems markets are tending to believe that negotiations are moving in the right direction and this is likely to provide further support to risk sentiment.
The release of Chinese GDP figures, which showed the economy has grown at its slowest pace in almost three decades, was not a surprise and this has been factored into asset prices. Fourth quarter GDP growth came in at 6.4% while full 2018 growth of 6.6% was slightly above Beijing’s target. U.S. trade tariffs have yet to deal direct significant impact to the country’s growth, however, the ongoing trade dispute is leading to a further slowing in consumer consumption and business capital expenditures. While China may continue to use its monetary and fiscal tools to offset the damage done by the trade conflict, there’s a limit on how much China may loosen policy given the swelling of its debt. It seems the only way for China to prevent a hard landing is to reach to a deal with the U.S., and that’s what the markets are hoping for.
UK Prime Minister Theresa May will unveil her Brexit “Plan B” to parliament later today after MPs rejected her initial “Plan A”. Her alternative plan is unlikely to differ much from the initial one and in the absence of any new information the UK may crash out of the EU on March 29. No one knows what will happen next, but the chances of a second referendum seem to be on the rise, as is an early general election. Traders need to be prepared for various outcomes, so expect Sterling moves to become more volatile in the days ahead.
The European Central Bank and Bank of Japan are both due to meet this week. No policy changes are expected from either, however updated guidance from ECB will move the Euro. Core Euro countries are experiencing sharp slowdowns. Germany and Italy may already be in a technical recession, and this is occurring as ECB ends its asset purchase program. The darkening economic outlook may put pressure on the ECB to keep interest rates at their current level for an extended period. If this is indeed the message from the ECB, the Euro may retest 2018 lows of around 1.12.
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