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Best of Web - Dec '19

Executive Summary

Global markets saw two major positive developments towards the middle of the month as the US-China phase one trade deal was announced to be almost final and Boris Johnson won a landslide majority in the British parliament to reduce Brexit uncertainty. But any optimism for 2020 appears to be cautious.

How final is the US-China phase one trade deal?

President Trump and the Chinese government have confirmed that the contents of the deal have been finalized. US Trade Representative Robert Lighthizer has mentioned that all that remains is to finalize the wording and do the official translations of the deal, for the official signing of the agreement to happen in January.

Under the agreement the US will stop going ahead with further tariffs in December and reduce the September tariffs by half, while China has pledged to increase the purchase of US exports by USD 200 bn, including USD 40 bn in US agricultural products. Further, China has pledged to improve protection of intellectual property rights, avoid currency devaluation for export competitiveness and improve access to its financial markets. However, U.S. tariffs of 25% on $250 billion worth of Chinese goods will remain unchanged, providing the basis for phase two negotiations.

Analysts have raised concerns as to how China can double its purchase of US agricultural products to USD 40 bn in a hurry when China’s total purchases of agricultural products abroad in 2018 amounted to only about USD 140bn. And there are concerns about a lack of clarity on actual commitments by China (beyond the rhetoric by politicians), enforcement and the ability to impose retaliatory actions if promises are broken.

Is Brexit uncertainty over after the big Boris win?

The 365 parliamentary seats won by PM Boris Johnson’s Conservative party has made the actual occurrence of Brexit – UK actually leaving the EU – almost a certainty on 31st January 2020; reinforced by the fact that it’s the largest win for the party since 1987. What is unsure is the nature of the Brexit that will occur – whether the UK and EU will be able to arrive at a comprehensive exit deal before the end of 2020 or whether it will be a no-deal Brexit. So, while businesses do not have to worry about whether Brexit will happen, there will continue to be uncertainty about doing business in and with the UK till end-2020.

How did financial markets react to this dual boost?

Following the announcement of the US-China phase one deal and the UK election outcome, global financial markets rallied, and a higher risk appetite helped emerging markets. Supporting markets was also the US Federal Reserve’s decision to pause rate cuts for a prolonged period in 2020, signaling cautious optimism about economic conditions in 2020. However, analysts’ concerns about actual implementation of the US-China trade deal, and the fact that tensions between the two countries continue, have prevented a continued rally in markets.

How have commodities been performing?

With expectations of improved demand conditions in 2020 following the US-China trade deal oil prices have risen in December so far. Output cuts by the OPEC+ group for 2020 has also added to this. Brent crude rose from a low of US$ 60.82 per barrel on Dec 3rd to US$ 66.16 per barrel by the 18th of December.

After falling significantly in November, gold prices have been relatively stable in December, despite the positive events. This appears to be due to some uncertainties on the implementation of the US-China trade deal. The month saw a low of $1,460.09 per ounce on Dec 6th, but the price recovered to $1,475.84 per ounce by the 18th.


Top 5

US-China trade deal 'totally done', Trump aide Lighthizer says

The “phase one” US-China trade deal will nearly double US exports to China over the next two years and is “totally done” despite the need for translation and revisions to its text, US trade representative Robert Lighthizer said on Sunday. He added a date and location for senior US and Chinese officials to formally sign the agreement was still being determined.

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Brexit relief for UK economy might not last long

Britain’s economy will cast off some of the Brexit uncertainty after Prime Minister Boris Johnson’s election triumph, but the question for investors is whether Johnson will stick to his campaign promise not to delay the end-of-2020 deadline for a new EU trade deal, creating another cliff-edge.

Unilever warning shows the global economy is still fragile

A sales warning from Unilever - one of the world's biggest consumer goods companies is undermining hopes for a significantly stronger global economy in 2020. The company announced that they will not be meeting the sales targets for 2019 and the trend would continue into 2020 due to the slowdown in South Asia.

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Chinese corporate debt is the ‘biggest threat’ to the global economy, says Moody’s chief economist

Moody’s Analytics described Chinese corporate debt to be the “biggest threat” to the global economy, following a similar comment by Fitch ratings. They explained that many companies are struggling to deal with a slowdown in growth stemming from the trade war and other factors.

India to be an outlier in the global economy: Nomura

Nomura expects that growth in major global economies may weaken in 2020. This will be offset by a handful of smaller EMs – Brazil, Mexico, India, Turkey and South Africa – rebounding from tepid growth in 2019.

Compiled by: Thilina Panduwawala

Disclaimer: This information has been compiled from sources believed to be reliable but Frontier Research Private Limited does not warrant its completeness or accuracy. Opinions and estimates constitute our judgment as of the date of the material and are subject to change without notice. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The recipient of this report must make their own independent decision regarding any securities or financial instruments mentioned herein. Securities or financial instruments mentioned herein may not be suitable to all investors.


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