Weekly Market Commentary – January 21, 2020

Optimism from continued progress on trade pushed the S&P 500 to new highs last week. The U.S. and China signed a “phase one” deal that included an agreement by the U.S. to reduce tariffs in exchange for promises of increased purchases of U.S. goods by China and adjusted rules to allow U.S. corporations to better compete in China. The U.S. Senate also approved the USMCA trade agreement, replacing NAFTA.

Key Points for the Week

  • The U.S. and China signed a phase one deal, and the Senate ratified the USMCA trade agreement.
  • Stocks climbed to new highs on news of trade progress.
  • Key global economic data were generally better than expected.

Economic data also provided a boost to stocks. In the U.S., manufacturing returned to growth, and retail sales beat expectations as Americans continued to spend freely in December. Retail sales rose 5.8% in 2019. Housing starts soared last month, driven by warm weather, lower rates, and confident buyers, as seen in the accompanying chart. Chinese economic data showed similar trends as industrial production and retail sales improved in the fourth quarter.

Financial markets remained in rally mode, and key indices all hit new 52-week highs during the week. The S&P 500 rocketed 2.0%. The global MSCI ACWI climbed 1.6%. The Bloomberg BarCap Aggregate Bond Index edged 0.1% higher.

Earnings announcements will likely be the main focus for investors this week. The number of companies reporting will more than double last week’s data and provide further insight into earnings and profit margins.

housing stats WMC

Trade Deals

At long last, the U.S. and China signed a “phase one” trade deal last week. The deal was better than expected and helped to push markets higher.

China agreed to dramatically increase its purchases of U.S. goods and services. In 2020, the Chinese agreed to buy an additional $77 billion. The following year, additional purchases will be added and nearly double current levels. The changes should reduce the trade deficit with China. Agricultural and energy exports to China will increase. The deal also paves the way for credit card systems and financial services to operate in China.

Most of the increased purchases will be easy for China to accommodate. A pork shortage in China has made some exports very much desired, and China needed additional agricultural imports and energy. More of those purchases will move to the U.S. Opening up financial services will provide additional opportunities for U.S. firms. The U.S. also persuaded the Chinese to make small steps to protect the intellectual property of U.S. corporations.

In return, the U.S. agreed to lower tariffs imposed in September and to not impose the tariffs scheduled to take place last December. The U.S. also dropped charges of China being a currency manipulator.

The deal represents a shift toward greater cooperation between the U.S. and China, but most of the tariffs imposed by both sides remain intact. The deal doesn’t address Chinese subsidies of key industries. Those subsidies and other restrictions make it difficult for many U.S. service companies to compete against Chinese companies. Large segments of the Chinese economy remain protected from competition as China remains focused on nurturing industries so they can compete globally.

Now that the deal is signed, the focus will shift to “phase two” negotiations and follow-through. Both sides would welcome a phase two deal, but subsidies, further intellectual property protection, and competing against cheaper Chinese products are more important issues to each side. Reaching a “phase two” deal is expected to be challenging.

Both sides must follow through on commitments. If the Chinese fail to make promised purchases or the U.S. returns to imposing new tariffs quickly, then trade could return as a key issue.

Investment markets have benefited from the truce and momentum behind a “phase one” deal. Unless both sides are anxious to reach a deal in 2020, investors shouldn’t expect trade negotiations to continue to boost markets.

Fun Story

China’s Far Reaching Influence

[This is the third of three stories about China as the Lunar / Chinese New Year approaches.]

The side effects of Hong Kong’s protests continue to reverberate around the world. Taiwan’s presidential election swung toward the existing president as the Taiwanese voted against candidates supporting a closer relationship with China. But the impact has been felt far beyond Asia. Demand for Swiss watches shrank as tourists stayed away from Hong Kong and locals decided buying a new watch wasn’t worth risking tear gas and riots. As the Chinese New Year begins this week, Swiss watchmakers are hoping for a more celebratory spirit.

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