Shares of Asian firms rose to the highest mark of three and a half weeks, seemingly infected with Wall Street’s optimism, where there is a gradual synchronization of sentiments with the investor-friendly news background.
The positive news was the decision of the negotiating groups of the US and China to extend the meeting for an unplanned third day. So, there is something to talk about, and the road to an agreement seems to be smoothing. As far as reports on trade negotiations go, the parties seem to prefer to seek resolution moving from simple to more sophisticated matters. China is exploring the possibility of renewing and increasing purchases of agricultural products and energy, as well as increasing the degree of openness of the economy. On the one hand, this can be considered a concession, but it has the character of necessity, as in the conditions of falling production volumes, exports and imports, foreign investment and import stimulus is an opportunity to support the economy.
Nevertheless, views on the path and pace of structural reforms in China vary widely among the warring parties. Less obvious immediate advantages and disadvantages of the arrangements determine the duration of the resolution of such issues. Therefore, the smoldering conflict between the two countries risks flaring up with a new vigor, which makes the market reaction to the progress in the negotiations rather restrained.
China has already shown its potential for revenge, hampering sales of Apple products in the domestic market. The company itself warned about the decline in sales, having destroyed the investors’ perception of it as one of the few islands of stability for investors on the US stock market.
Trump tweeted that negotiations are going well, which supported demand for risk.
On Tuesday, SPX rose almost 1 percent, bringing the size of the correction from pre-Christmas lows to almost 9 percent.
Trump, in anticipation of the negative consequences of his own foreign policy, seeks to come to an agreement with China as soon as possible. This was reported by Bloomberg referring to sources in the White House.
As I wrote earlier, the retreat of aggressive policy of the Fed, marked by Powell’s speech, initiated a search for yields in the market, which can be seen from the steady growth of stock indices, slide in risk-free assets and, for example, the rapid reduction of short positions in the ruble. From the beginning of the year, the USDRUB has rolled back from 70 to 67 rubles per dollar. The extreme bias in favor of protective assets before the New Year was clearly visible in the yield of Japanese bonds, for which the Bank of Japan expanded the fluctuation corridor last summer. Despite this, the yield in the pre-New Year period itself came to 0 and even went into the negative zone, however, for several days it’s been rapidly retreating:
The price for WTI has increased to $50 a barrel due to an unexpected reduction in US inventories, according to API data. Oil prices are also supported by the prospects for recovery in consumption if progress in negotiations between China and the United States continues to increase.
It will be interesting to look at the minutes of the Fed meeting in December. After the abrupt change of Powell’s tone, the wording on the continuation of aggressive policy of tightening may lose some sense, but if the data allows the interpretation of the “hesitant Fed”, this will cause an additional influx of investors into risky assets, since “words supported by deed” sound much more convincing. Tomorrow, Powell is speaking at an economic club in Washington and he will probably try to re-support the bullish mood in the market, so expectations for the end of the week will probably be focused on continuation of the rally.
Please note that this material is provided for informational purposes only and should not be considered as investment advice. Trading in the financial markets is very risky.