President Donald Trump's delayed increasing of US tariffs on Chinese goods -– effectively extending the 90-day trade war truce -- brings us to re-assess the risk factors.
To put things in perspective, the trade war truce would have culminated by the end of February and in case of no agreement, the US had planned to raise trade tariffs to 25 percent (from 10 percent) on imports worth $200 billion from China.
Extension of truce underlines the conciliatory approach been witnessed over the last few months in contrast to belligerent stance last year, which has been a harbinger of the global trade slowdown. Apparently there has been progress on key irritants between two countries: intellectual property protection, technology transfers, agriculture, services and currency. Media reports suggest that key modalities, which need to be ironed out is a strong enforcement mechanism so that Chinese reform commitments are followed through. As President Trump agreed to a summit meet with the Chinese counterpart, apparently a deal breakthrough in the near term cannot be denied.
At least, equity markets think so. Shanghai Index is up more than 5 percent on February 25. It’s already at an eight-month high, 20 percent higher from January lows.
Interestingly, the last such summit at Mar-a-Lago happened about two years back, when both countries agreed to set-up a 100-day action plan to resolve their trade differences.
An accommodative Fed
Last week, minutes of the Federal Reserve's January meeting gave a supportive narrative, particularly on the liquidity front. While the policy rate pause is expected to continue till either inflation edges higher or the global risk events fade, stance on balance sheet unwinding deserves special mention.
There has been increasing deliberation around its balance sheet unwinding stance in at least the last three meetings. And its stance has changed from an auto-pilot unwinding of balance sheet in the background to a possibility that it may halt the unwinding later this year and keep the balance sheet size at elevated levels compared to earlier monetary policy cycles.
Market impact
As far as US equity markets are concerned, developments pertaining to the Fed and progress on trade talks have helped S&P 500 scale up 18 percent from its December 2018 lows. Interestingly, now it is close to the levels at the start of 2018 before the trade war intensified. While S&P 500 is five percent below its all-time high, it is at a very significant resistance level on the technical charts. Shanghai Index is still 17 percent away from its early 2018 high. Nifty, amusingly, had not participated in the downward drift in the last quarter, but it is also struggling with a key resistance level.
Nifty versus S&P 500, Shanghai Index
So, what can make these indices move beyond where they are?
Read: Second half of 2019 will be better for risk assets
China: Tangible favourable declarations on the trade talk’s front and progress on key domestic reforms. One of the key areas where investors can expect progress is the deepening of financial sector reforms. On the domestic front, China is maintaining a fine balance between deleveraging and supporting liquidity needs of the real economy.
Xi Jinping pointed out recently that one of the reform ideas is to accommodate the financing needs of small enterprises having high operating risks, along with enhancement of the financial system's efficiency in asset pricing and risk management.
US and rest of the World: Among other key risk is that of an orderly Brexit. As the Brexit deadline is around the corner (March 29), there is still no breakthrough. Theresa May is hoping for a vote on a Brexit deal on March 12. Alongside, the UK is also re-negotiating with the European Union on the controversial Irish backstop.
Read: Brexit in limbo
Domestic market
Back home, we take solace from the positive developments from the central banks and trade talks. An amicable US-China trade agreement would also be conducive for India as the restoration of commodities supply chain would ease out dumping from China.
So, what can make these indices move beyond where they are?
Read: Second half of 2019 will be better for risk assets
China: Tangible favourable declarations on the trade talk’s front and progress on key domestic reforms. One of the key areas where investors can expect progress is the deepening of financial sector reforms. On the domestic front, China is maintaining a fine balance between deleveraging and supporting liquidity needs of the real economy.
Xi Jinping pointed out recently that one of the reform ideas is to accommodate the financing needs of small enterprises having high operating risks, along with enhancement of the financial system's efficiency in asset pricing and risk management.
US and rest of the World: Among other key risk is that of an orderly Brexit. As the Brexit deadline is around the corner (March 29), there is still no breakthrough. Theresa May is hoping for a vote on a Brexit deal on March 12. Alongside, the UK is also re-negotiating with the European Union on the controversial Irish backstop.
Read: Brexit in limbo
Domestic market
Back home, we take solace from the positive developments from the central banks and trade talks. An amicable US-China trade agreement would also be conducive for India as the restoration of commodities supply chain would ease out dumping from China.
We provide you sure shot Commodity & Equity Market Tips, Intraday tips, share market tips, Mcx bullion tips, Mcx tips, Crude tips, Stock tips, Future and Cash tips with Technical & Fundamental Research.
Visit: www.ripplesadvisory.com
Contact us @ +91-9644405056
No comments:
Post a Comment