· The dollar pared losses but remained lower against the euro and the yen on Wednesday after the United States and China signed a deal to de-escalate their trade war.
The two countries announced an initial trade deal on Wednesday that will roll back some tariffs and boost Chinese purchases of U.S. goods and services, defusing an 18-month conflict between the world’s two largest economies. But the deal will leave in place 25% tariffs on a vast, $250 billion array of Chinese industrial goods and components used by U.S. manufacturers.
There is “not much of a reaction at all to the trade deal signing,” said Shaun Osborne, chief fx strategist at Scotiabank in Toronto. It may be a mild negative going forward for the greenback, however.
“The dollar has done relatively well out of the uncertainty element that this protracted trade war has caused,” Osborne said. “So, at the margin we think its a dollar negative.”
The euro was last up 0.22% against the greenback at$1.1151. The dollar dropped 0.05% against the yen to 109.91, after the Japanese currency on Tuesday hit its weakest level since May at 110.20.
Sterling edged higher, reversing earlier losses after data showed UK inflation rose at its slowest in three years, feeding expectations the Bank of England would cut rates in January.
· China’s GDP growth to gradually moderate to 5.9% amid existing tariffs: UOB
Peter Chia of UOB expects China’s GDP to gradually moderate to 5.9% this year and he is looking at a target of 6.85-7.20 trade range for Chinese yuan against the U.S. dollar.
· U.S. and China tiptoe around holes in new trade agreement
The United States and China signed an initial trade deal on Wednesday that will roll back some tariffs and boost Chinese purchases of U.S. products, defusing an 18-month row between the world’s two largest economies but leaving a number of sore spots unresolved.
Beijing and Washington touted the “Phase 1” agreement as a step forward after months of start-and-stop talks, and investors greeted the news with relief. Even so, there was skepticism the U.S.-China trade relationship was now firmly on the mend.
The deal fails to address structural economic issues that led to the trade conflict, does not fully eliminate the tariffs that have slowed the global economy, and sets hard-to-achieve purchase targets, analysts and industry leaders said.
The centerpiece of the deal is a pledge by China to purchase at least an additional $200 billion worth of U.S. farm products and other goods and services over two years, above a baseline of $186 billion in purchases in 2017, the White House said.
Commitments include $54 billion in additional energy purchases, $78 billion in additional manufacturing purchases, $32 billion more in farm products, and $38 billion in services, according to a deal document released by the White House.
Liu said Chinese companies would buy $40 billion in U.S. agricultural products annually over the next two years “based on market conditions.” Beijing had balked at committing to buy set amounts of U.S. farm goods earlier, and has inked new soybean contracts with Brazil since the trade war started.
Key world stock market indexes climbed to record highs on hopes the deal would reduce tensions, before closing below those highs, while oil prices slid on doubts the pact will spur world economic growth and boost crude demand.
· 'Phase 2' U.S.-China trade talks have already begun: Pence
U.S. Vice President Mike Pence said on Wednesday that discussions had already begun on a “Phase 2” U.S.-China trade deal, hours after Washington and Beijing signed an initial trade pact that defused some tensions but left some major issues unresolved.
“We’ve already begun discussions on a Phase 2 deal,” Pence said in an interview with Fox Business Network. He gave no further details.
· China trade truce is seen as ‘fragile’ with analysts still seeing more tariffs as a possibility
The “phase one” trade deal between the U.S. and China ends some uncertainties for the global economy, but tensions between the U.S. and its trading partners could continue, even with the reprieve.
Analysts also expect trade skirmishes to crop up elsewhere, and they expect the Trump administration could have Europe in its sights for its next round of tariffs.
With China out of the way, the new risk is that Trump puts tariffs on Europe both because of a WTO ruling that found Airbus received subsidies and a French digital tax on U.S. companies. The administration has been looking at putting tariffs on French wine and other goods.
Clifton said a ruling is expected from the World Trade Organization that Boeing received subsidies, and that could open the door for some accord between the U.S. and Europe.
“The one risk is you’re going to see a flare up on Europe,” said Clifton. “That may spook investors and may give investors a reason to take profits after a big run up in stocks...It probably would be a buying opportunity if there was a sell-off on Europe in Q1.”
The Washington Post reported Wednesday that Trump threatened to put 25% tariffs on European autos if European countries did not call out violations by Iran of its nuclear treaty
· The port of Hong Kong, once the world’s busiest, could get a boost after the phase one trade deal between the U.S. and China is signed, according to the managing director of Modern Terminals.
The Port of Hong Kong was the world’s busiest container port by volume in 2004, according to the Hong Kong Port and Maritime Board. But it has since been overtaken by others in the region — a worrying trend as the port business is one of the key drivers of Hong Kong’s economy.
“China agreeing to buy another $200 billion worth of goods and services from the United States, and I think more importantly, addressing the issues around IP (intellectual property) protection and forced technology transfer and opening up markets more for financial industry and the insurance industry — those are major positive steps. And the U.S. side then coming back and lowering tariffs,” Levesque said.
· The Federal Reserve’s policy of low interest rates, combined with its efforts to calm money markets by increasing the central bank’s balance sheet, could be pumping up the valuations of risky assets, Dallas Fed Bank President Robert Kaplan said Wednesday in New York.
The Fed official said the central bank should focus on keeping its balance sheet as small as possible and scale back interventions in the market for repurchase agreements, or repo, now that short-term rates are stable.
· The Democratic-led House of Representatives voted on Wednesday to send two formal charges against President Donald Trump to the Senate, clearing the way for only the third impeachment trial of a U.S. president to begin in earnest next week.
The 100-seat Senate is expected to acquit Trump, keeping him in office, given that none of its 53 Republicans has voiced support for removing him, a step that under the U.S. Constitution would require a two-thirds majority.
But Trump’s impeachment by the House last month will remain a stain on his record and the televised trial in the Senate could be uncomfortable for him as he seeks re-election on Nov. 3, with Biden a leading contender for the Democratic nomination to challenge him.
· Oil prices on Wednesday fell after a U.S. report showed big increases in gasoline and distillates inventories and as crude production rose to a new record.
Prices were also under pressure from an OPEC report saying the producer group expected lower demand for its oil in 2020 even as global demand rises, as rival producers grab market share and the United States looks set for another output record.
U.S. gasoline stockpiles last week rose to their highest since February, while distillate inventories jumped to their most since September 2017, according to the U.S. Energy Information Administration (EIA).
The EIA report also showed crude production for the week ended Jan. 10 rose to 13 million barrels per day (bpd).
Brent futures fell 49 cents, or 0.8%, to settle at $64.00 a barrel, while U.S. West Texas Intermediate crude fell 42 cents, or 0.7%, to settle at $57.81 per barrel.
Earlier in the session, WTI was trading at its lowest level since Dec. 4, while Brent crude was at its lowest since Dec. 11.
· In an angry speech on state television, Iranian President Hassan Rouhani lashed out at the U.S. and Europe for its presence in the Middle East and for what he described as the latter’s failures in upholding the 2015 Iranian nuclear deal.
U.S. troops are “insecure” in the region today, and EU troops “might be in danger tomorrow,” Rouhani declared, according to a Reuters translation, marking the first time the leader has directed a threat toward European forces in the region. He demanded the U.S. leave and accused it of making the region insecure, saying it should “apologize to Tehran” for its “previous crimes.
Reference: CNBC, Reuters
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