News & Analysis

Weekly Summary: Reality Check on Trade Negotiations

November 22, 2019

Weekly Summary

Reality Check on Trade Tensions

The trade winds have blown and the expectations have changed this week. The recent optimism has receded in the markets as new developments on the trade front have emerged. As the year comes to an end, investors are also facing the shift from “cut” to “hold” from major central banks.

Trade Headlines

Conflicting trade news dominated headlines this week which sent the markets on a volatile ride. Even though we saw fresh record highs on Wall Street, the momentum was being challenged by various news coming from Washington and Beijing and renewed threats from President Trump. We identified three main headlines that drove the market’s sentiment:

Huawei

The week started with some pessimism in Beijing due to the reluctance from the US to roll back tariffs. However, the US has granted a new 90-day licence extension allowing US companies to continue doing business with Huawei.

The move brought some reassurance that it will contribute favourably to the trade negotiations table. Major US equity benchmarks, therefore, budged higher to fresh record highs.

Phase One to drag into 2020

The recent confidence was marred by the reports that Phase 1 of the trade deal might slide into 2020. Up until now, investors were pricing in a sort of deal before the year ends and the new developments are forcing investors to do a reality check. President Trump is also renewing his threats which sent investors reeling on the state of the trade negotiations.

Hong Kong Human Rights and Democracy Act

The Act directs that “various departments to assess whether political developments in Hong Kong justify changing Hong Kong’s unique treatment under U.S. law.”

In other words, the Act threatens to revoke and impose penalties if the special status given to Hong Kong was compromised. Trade talks have reached a sensitive juncture and the Act can be used to put pressure on Beijing.

The US passed the Act through a voice vote and if President Trump signed the Act into law, China has vowed to retaliate fiercely.

Central Banks on Hold

The FOMC minutes was one of the main events on the economic front. After a global wave of easing policies, we note that major central banks are on pause. The FOMC minutes did not reveal anything new other than the Fed is on pause and will only cut interest rates if there is a significant slowdown.

Saudi Aramco

World’s largest company
World’s biggest state-owned oil and gas companies
World’s cheapest oil producer
A leader in oil production
Second-largest proven crude oil reserves

Saudi Aramco’s IPO is geared to be one of the most hyped IPOs of all time. Saudi Arabia officially launched the IPO and confirmed that the domestic listing will take place in December.

The details of the IPO did not meet expectations which initially weighed on oil prices. However, despite a domestic listing, a lower valuation and a smaller stake, the IPO will be one of the key determinants of the immediate price action of the oil.

Given the current headwinds in the oil industry, the listing was limited to a local affair as bankers could not convince many international money managers of the merits of the deal and the valuation.

Therefore, the success of the IPO is even more dependent on higher oil prices.

OPEC’s de facto leader is Saudi Arabia and it is reported that the Saudis are set to push OPEC countries to make deeper oil cuts to keep oil prices higher.

The IPO could provide some upward room for oil prices.

As of writing, WTI and Brent Crude oil are trading higher at $58 and $62 from a low of respectively lifted by bullish EIA report and higher expectation of OPEC production cuts.

Brexit – Election Debate

The British Pound has remained in the elevated levels mainly backed by the prospects of a majority win by the Conservative Party. However, the first election debate has probably changed the dynamics a little. Even though surveys have been pretty inconsistent on the percentage regarding the performance of Mr Boris Johnson and Mr Jeremy Corbyn, they did show that the leader of the Labour Party has gone down better than initially thought.

The GBPUSD pair has lost some ground but stayed at the 1.29 level after occasionally dropping to 1.28 level. Against a backdrop of macro fundamentals, the pair is primarily being driven by the election.

Monday, 25 November 2019 Indicative Index Dividends ^{Dividends are in Points}
ASX200	WS30	US500	US2000	NDX100	CAC40	STOXX50
0	6.443	0.37	0.059	0	1.724	0
ESP35	ITA40	FTSE100	DAX30	HK50	JP225	INDIA50
0	0	0	0	0	0	0

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