EU MORNING: I Bet You A Yuan And Raise You An S&P


*Sterling punched down but worst is yet to come
*US CPI drowned out by US-China cheers
*Capex uncertainty won’t subside just yet
*JPM to be a pacesetter for equities performance tonight



Sterling has a big fortnight ahead

GBPUSD Sterling manages to just hold on after a weak batch of UK data added to its woes and raised the volume for calls that the BoE should cut come its next MPC meeting. Weekend news of MPC member Tenreyro being the latest to join the BoE’s rate-cut camp is now largely priced in. But the question still remains whether the BoE can get enough member support. As it stands, markets are split on a 25bps rate cut with marginally less than 50% likelihood priced-in, though, this could all change very quickly depending on how the next fortnight plays out.
 
With UK Retail Sales out Friday and UK PMI due on Jan 24, we’re likely to reach a conclusion sooner rather than later on how the UK economy has been tracking. We’ve seen a significant amount of interest in the front end of the UK yield curve and that’s only going to heat up with the massive amount of weight put on UK PMIs, as well as, incoming Governor Bailey set to put his own spin on the BoE’s reaction function.
 

US CPI to play second fiddle

The major risk event tonight in US inflation numbers is likely to be stowed to the side as investors cheer US-China trade negotiations and sustain equities at all-time highs on the influx of positive communications. Don’t get me wrong, there’ll still be a look-in from the Fed with headline inflation set to print 0.2% m/m, but it’s hardly going to challenge market expectations around the Fed’s near-term outlook and wait-and-see stance.
 
Instead, US-China Phase One is expected to be signed and risk-on flows will continue to dominate unabated. Other soundbites to hit the wire in China’s pledge to buy US$80bn more US manufactured goods consisting of machinery, agricultural and autos above a 2017 baseline, and label as a currency manipulator being removed, only works to further buoy risk sentiment – excessive as it is. USDCNH Offshore Yuan, the bellwether for US-China trade sentiment, now reaches 6-month lows having just about retraced August’s run-up during a time of peak pessimism.
 

Is Capex uncertainty subsiding on US-China trade?

China released import and export numbers for December, which seem to have massively outperformed consensus expectations. Exports drew a print of 7.6%, well above a 3.2% expected rise, while imports at 16.3% outstripped 9.6% consensus. Both figures make for an interesting conversation in 2020 on where China demand is at, and whether global trade is set to improve as US and China ostensibly display a more collaborative relationship that leads to de-escalation.  
 
It’s hard to say. While a Phase One deal is absolutely positive for sentiment and on face value will be perceived as a step in the right direction, the pervasive difficulties of Phase Two are only right around the corner. As a business, one that needs to make decisions over the next two decades on where to position its global supply chain, trade policy certainty probably isn’t low enough just yet to incentivise capex investment to levels seen pre-crisis.
 

US reporting season gets underway

In equities news, European markets point higher with FTSE futures suggesting a marginal gain at the open to the tune of 6pts. Though the most pressing moves will likely come in the wake of key earnings results from a spate of major US companies as US reporting season gets underway.
 
If the likes of global businesses in JP Morgan and Citigroup – first to kick-off - manage to not only register positive results, but more importantly, marshal an optimistic outlook over the next 12 months, then the tone will be set for equity markets to surge higher till end of January.
 
Markets will be hunting for signs of apprehension over this reporting season with outlooks and sentiment more pressing given where we are valuations wise. Even if we do catch some subpar results, simply issuing a positive outlook on forward guidance is all of the sugar hit markets need to be swayed to stay long.
 



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