Submitted by Rabobank’s Michael Every
Getting closer and closer…
…But closer to what exactly? Closer to a trade deal? Closer to a soft Brexit? Closer to heaven? Or just closer to the abyss?
Yes, the key news of course is that the US and China are getting closer to a deal (luckily we haven’t heard this before). Trump’s economic advisor Larry Kudlow noted yesterday that the talks were “making good headway”, but he also warned that “they are not there [yet]”. Trump is said to meet with China’s envoy Liu He today. But there is still no set date for an official meet-up between Trump and President Xi, which would be seen by the market as the signal that a trade deal is imminent. Bloomberg is reporting that under the proposed agreement, China would commit by 2025 to buy more U.S. commodities, including soybeans and energy products, and allow 100 percent foreign ownership for U.S. companies operating in China. If China would not keep to this pledge, it would trigger retaliation from the U.S. On top of that, there would also be non-binding promises China has offered to implement by 2029 wouldn’t be tied to potential U.S. retaliation.
Altogether – and we note that there is still very little detail on substance – this still sounds like a weak compromise that would give both sides a reason to claim victory in the short term, but that could easily break down as time progresses, as getting China to commit to tough and painful reforms remains elusive in our view.
Alas, yesterday’s news flow proved sufficient for markets to lavish themselves, which underscores investors’ eagerness to jump on the bandwagon. Perhaps because they are afraid to lose out on the “last ride to the top”? The Eurostoxx index jumped 1.2% and similar gains were seen in many other markets. The US S&P500 rose more modestly (by ‘just’ 0.2%), but perhaps because its all-time high is only a few percentage points away? Remarkably, it was not just equities that did well, it was actually government bonds that suffered, led by higher yields on Gilts and Bunds.
Despite warnings by European Commission President Jean-Claude Juncker that a hard Brexit is becoming more likely, higher Gilt yields were driven by a better tone in sterling as PM May met with Labour Leader Corbyn to find another solution to the Brexit stalemate; as this would likely lead to closer ties to the EU than most of her Brexit supporters in her cabinet want, it did offer only modest support to sterling. Moreover, these May-Corbyn talks were said to be less productive than both leaders initially wanted to suggest. But as the House of Commons last night voted 313-312 to block a “no deal Brexit” it further cemented the more positive sentiment in sterling. There is general agreement that the Upper House will uphold the bill passed by the Commons, thus providing a reason for the market to assume that as the worst of all solutions is being ring-fenced, it can now focus on the alternatives – which by definition will be of a softer nature, albeit not unequivocally positive.
Bund yields were also driven higher by rising hopes that Brexit will eventually be settled in a relatively soft form as well as the notion that the trade talks between the US and China are entering their final stage. But it was also the better tone in data that added its bit. The Italian Services PMI rose 2.7 points to 53.3, taking the Eurozone average to a similar level and well above levels normally associated with steep downturns (this was clearly not the case in the UK, where the Services PMI finally gave way and plunged below the boom-bust mark to 48.9). That was followed later in the morning by a very decent retail sales number for the euro area as a whole. Sales volumes rose 2.8% y/y in February, suggesting that the weakness in the Eurozone remains very much concentrated in the industrial sector. That point was further highlighted by astonishingly weak German factory orders, released this morning. Overall orders fell 4.2% m/m taking y/y rate down to -8.4%, the lowest since October 2009. Details of the report showed a sharp fall in foreign capital goods orders, which again, clearly points in the direction of Asia, particularly China. Although we have to bear in mind that the February numbers could have been biased downward due to the timing of the lunar New Year celebrations in China, the fact that the German manufacturing PMI for March was even weaker than the one for February, clearly demonstrates that the slump in industry may not be over yet and that means that there is still a considerable risk that it will spill over to the broader economy.
So for now, we may be getting closer to the edge than to a much-needed stabilisation in economic activity.
via ZeroHedge News https://ift.tt/2uJb1f3 Tyler Durden