cautious optimism ahead of US-China talks

Victoria Adam,

published on 07/10/2019 at 20h00

(Boursier.com) – The New York Stock Exchange has begun the week saw the ups and downs, investors questioning the chances of reaching a trade agreement between the United States and China. The talks will resume this Thursday in Washington, but Beijing would not be ready to sign a global agreement. Markets also continue to question the health of the US economy, after employment figures and indicators of activity slowed in September. In this context, speculation about further Fed rate cuts is increasing.

After several incursions into the red, the index Dow Jones gained 0.27% to 26,645 points two hours of the closing, while the broad index S & P 500 moved from 0.17% to 2.957 pts, and that the Nasdaq Composite, rich in technology and biotechnology stocks, rose 0.27% to 8,003 pts.

Last week, the Dow Jones fell 0.9% and the S & P 500 fell 0.3%, these two indices now chained after 3 consecutive weeks of decline. The Nasdaq rose last week (+ 0.5%) after two weeks of decline.

China would only be ready for partial agreement

On Monday, the White House confirmed that a high-level Chinese delegation, led by Deputy Prime Minister Liu He, was expected Thursday in the United States for further negotiations on trade between the world's two largest economies, a few days of the expected date of tariff increases on thousands of Chinese products imported.

Larry Kudlow, the White House's chief economic adviser, reassured Fox News that progress was "possible" this week. He reiterated that the exclusion of Chinese companies from US stock markets was "not on the table," after news reports last week on the subject.

For its part, China leaves a doubt about the possibility of a broad trade agreement. According to the agency Bloomberg, Beijing has thus reduced the number of topics it is willing to discuss, including excluding any reform of its industrial policy, as well as the issue of state subsidies. But last week, Donald Trump had said that the United States would accept a full agreement and not partial.

According to sources quoted by Bloomberg, China would consider that Donald Trump is weakened politically by the impeachment procedure opened against him by congressional Democrats. Beijing could therefore take the opportunity to try to win a minimum agreement, considering that an agreement, whatever it is, would correct the confidence rating of the American president to his public opinion.

The latter lives in fear of a slump in the economy caused by the trade war between the two largest economic powers in the world.

Risk of recession in case of escalation of customs duties?

If the United States implemented the next tariff increase, virtually all imports from China would be subject to additional taxes. According to the Swiss bank UBS, this would lead to a significant slowdown in growth in the first half of 2020 "with high risks of recession" in the United States …

For its part, the National Association for Business Economics (NABE), in a study unveiled on Monday, for its part on a slowdown in US growth to + 1.8% next year, which would mark the first year of growth below 2% under the Trump presidency.

In this uncertain environment, investors are betting that the Federal Reserve will do what is necessary to support the activity, lowering at least once its key rates by the end of the year. In a public speech Friday night, Fed Chairman Jerome Powell did not provide a specific answer to this question, but neither did he shower the hopes of the markets.

In a much anticipated speech, Powell said that "overall, the economy is, as I like to say, in a good position." He added, however, that growth is facing challenges related to "weak growth, low inflation and low interest rates". The economy "is doing well", despite "the risks", and the role of the Fed is to "keep it as long as possible," he said.

Another rate cut expected on October 30

According to the FedWatch barometer of the CME Group, the odds of lowering fed funds rates by a quarter of a point after the meeting of 29 and 30 October were Monday night at 71.1%. The fed funds rate would then be reduced to between 1.50% and 1.75% after the quarter-point decline of 18 September and that of a quarter of a point in July. The markets are on the other hand very divided on a 2nd fall by the end of the year. The probability is thus 35.7% for a return to 1.25% -1.50% at the meeting of December 11, and 49.9% for a level of 1.5% -1.75%.

In the bond markets, the yield on the 10-year US government bond (T-Bond) rebounded slightly on Monday, returning 2 basis points to 1.55% after seven consecutive declines.

On the foreign exchange market, the dollar index, which measures its evolution against 6 reference currencies, advanced by 0.16% to 98.96 points, while the euro was stable at $ 1.0977. The British pound yielded 0.23% to $ 1.2303 in the face of growing uncertainty over Brexit terms as the October 31 deadline approaches.

Oil prices rose Monday after a 5.5% decline last week in the face of fears of global growth. On the Nymex, US light crude WTI Monday gained 0.7% to $ 53.22 on the Nymex (November futures contract), while Brent rose 0.75% to 58.81 $.

Gold lost ground on Monday, starting the week at $ 1,495.50 per ounce (-1%), for the December futures contract quoted on the Comex market.

VALUE TO FOLLOW

PayPal (-1%) withdraws from the grouping associated with the digital currency project Libra of the giant of social networks Facebook (stable).

General Electric (stable). The American industrial and financial colossus has reported the freezing of the pension plan of approximately 20,000 employees in the US as part of its deleveraging projects.

General Motors (-1%). The UAW (United Auto Workers) has rejected GM's proposals. The 48,000 members of the car union have been on strike for nearly a month, following the failure of talks with management on various issues, ranging from pay to health.

Uber Technologies (+ 3%), giant of the VTC, profits this day on the stock exchange of a council enhanced with the purchase of Citigroup.

Dish Network (+ 1%). Customers of the satellite TV group can tap the FOX channels. A multi-year agreement has just been sealed between the two firms.

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