Weekly View - Signed at the line
The ‘phase one’ deal is done and China is no longer a currency manipulator, according to the Trump administration. The Chinese yuan appreciated last week and there does not appear to be any signs of intervention by the Chinese authorities. However, the Swiss franc has now moved back onto the currency-manipulation watchlist for meeting two of the US Treasury department’s criteria for manipulation. The US dollar strengthened last week, although we expect it to weaken this year. In forex, we are positive on the Swiss franc and the Japanese yen, both safe haven currencies.
Beyond trade, it looks like the Chinese economy could be turning a corner. Despite posting its lowest growth in three decades, a few factors lend optimism to the world’s second largest economy this year. Nominal GDP growth, which tends to be a leading indicator, ticked up from Q3 2019. This is good news for industrial profits, which have a strong correlation with nominal GDP. Furthermore, not only did both Chinese exports and imports rebound, but within imports, iron ore and copper showed particularly strong growth, which validates the recovery of China’s industry. For its part, the US economy is holding steady so far. December retail numbers came in line with expectations and inflation remains subdued. This means central banks should remain accommodative for longer and we are neutral on US Treasuries.
Q4 earnings season has kicked off with US equity valuations at their highest level in years. US banks began reporting last week. JP Morgan, the largest US bank by assets, not only beat analyst expectations, but delivered the best results for any US bank in history. Morgan Stanley also positively surprised investors, while other large US banks disappointed. US companies outside of the financial services sector that have reported so far have delivered a mix of both positive and negative surprises – although at more muted levels and so far more positive than negative. This week tech companies will begin reporting and given the mixed results so far, this is an ideal environment for stock pickers.