- Weekly global market focus
- Markets closely watch US/Iran tensions
- Senate returns to session facing impeachment trial and USMCA
- China has yet to confirm President Trump’s Jan 15 signing date for US/China trade deal
Weekly global market focus — The U.S. markets this week will focus on (1) geopolitics as the markets wait to see if Iran will retaliate in some way for last week’s U.S. killing of Iran’s top general, (2) oil prices as Feb Brent crude oil prices last Friday soared by +3.55% to an 8-month high on concern that US/Iran tensions could disrupt oil flows in the Middle East, (3) when the US/Chinese trade deal might be signed, (4) Fedspeak as Fed officials get back into speaking gear this week, (5) the Treasury’s sale of $78 billion of 3-year, 10-year, and 30-year securities, and (6) a light earnings week with only four of the S&P 500 companies reporting (Constellation Brands, Lennar, and Walgreens on Wednesday, and Intuitive Surgical on Thursday).
This week’s U.S. economic calendar is fairly busy with the key report being Friday’s Dec unemployment report. Dec payrolls are expected to show a respectable increase of +162,000 after Nov’s +266,000, and an unchanged unemployment rate from Nov’s 50-year low of 5.5%.
This week’s European economic schedule is busy. Key reports include (1) Tuesday’s Eurozone Nov retail sales report (expected +0.6% to reverse Oct’ -0.6%) and Eurozone Dec CPI (expected +1.3% y/y after Nov’s +1.0%), (2) Wednesday’s Eurozone Dec consumer confidence index (expected +0.1 to 101.4 after Nov’ +0.5) and (3) Thursday’s Eurozone Nov unemployment rate (expected unchanged at 7.5%). UK Prime Minister Johnson will be trying to ram his Brexit bill through Parliament, which reconvenes this week.
The Asian markets come into this week on a cautious note due to US/Iran tensions but pleased with the PBOC’s move last Thursday to cut the large-bank reserve requirement ratio (RRR) by -50 bp to a 12-year low of 12.50% effective today. That move frees up about 800 billion yuan ($115 billion) of liquidity and bank-lending capacity for the Chinese banking system. Last Thursday’s RRR cut added to the Chinese government’s stimulus action in late December when banks were instructed to start basing their loans to corporations on the 1-year loan prime rate of 4.15%, which is -20 bp lower than the former 1-year benchmark rate of 4.35%.
Chinese economic reports this week include Wednesday night’s Dec CPI report (expected +4.7% y/y vs Nov’s +4.5%), and Thursday night’s Dec new yuan loans (expected +1.25 trillion yuan after Nov’s +1.4 trillion yuan).
Markets closely watch US/Iran tensions — The markets are closely watching US/Iran tensions since Iran has promised to retaliate for the U.S. killing late last week of Iran’s second most powerful official, General Soleimani. The retaliation, if it comes, could be in the form of an assault on U.S. diplomatic or military assets, a terrorist attack on civilians, or an attack on oil tankers or oil facilities in the Middle East. President Trump over the weekend said that the U.S. has chosen 52 targets to hit in the event that Iran retaliates for the killing of General Soleimani.
US/Iran relations deteriorated further over the weekend after Iran announced that it is pulling out of the nuclear deal. The pull-out suggests that Iran might soon resume its enrichment of nuclear fuel and restart its nuclear weapons development program. That might cause President Trump to launch an attack on Iran’s nuclear facilities at some point down the road or in retaliation for any new attacks by Iran. In Iraq, the Iraqi parliament on Sunday approved a non-binding resolution demanding that the U.S. pull its military out of Iraq.
Senate returns to session facing impeachment trial and USMCA — As Congress returns to session early this week, the first order of business is whether there will be some type of deal about the Senate’s trial rules that convinces House Speaker Pelosi to transmit the articles of impeachment to the Senate. If Ms. Pelosi does not transmit the articles of impeachment to the Senate, then Senate Majority Leader McConnell has said that the Senate will resume its normal business rather than hold the impeachment trial in January as its first major item of business.
The Senate will consider the USMCA this week and could even pass the revised treaty by the end of this week. The markets would be pleased if the Senate approves the USMCA since that could release a burst of investment by companies once the long-term trade rules governing North American trade have been set.
China has yet to confirm President Trump’s Jan 15 signing date for US/China trade deal — China has yet to confirm a signing date of January 15 for the US/China phase-one trade deal. President Trump last Tuesday tweeted that he will sign the US/China phase-one trade deal on January 15 at a ceremony at the White House with high-level Chinese officials. Mr. Trump also tweeted that, “At a later date I will be going to Beijing where talks will begin on phase two.”
The fact that China has not yet confirmed the Jan 15 signing date suggests that President Trump may have surprised Chinese officials with his signing offer. Whatever the signing plan turns out to be, the markets will be pleased when the phase-one trade agreement is signed since that would eliminate the possibility of any last-minute glitches on how the agreement should be interpreted.
The markets are also waiting to see the details of the agreement, which will not be released to the public until the agreement is signed. The U.S. has claimed that China agreed to buy $40 billion of U.S. ag products annually in 2020 and 2021, and President Trump has claimed that the purchase obligation is even higher at $50 billion. China has yet to confirm any exact figures on agriculture purchases. China is expected to struggle to buy $40 billion of U.S. ag products in 2020 since that is far higher than the pre-tariff level of $24 billion in 2017 and the record high of $29 billion in 2013.