Equities bounce back

By David Morrison  |  23/01/2019 15:57

US/China trade talk headlines lead to sharp market swings. Meanwhile, President Xi Jinping issues a warning and sterling soars as ‘No Deal Brexit’ fears fade
 
Asian Pacific stock indices ended mixed on Wednesday, but US and most European equities had a more positive start, making back a decent proportion of losses from the previous session. Headline news items concerning US/China trade talks have continued to push risk assets in both directions. Yesterday equities fell on a report from the Financial Times that US officials had cancelled a trade meeting with Chinese negotiators. However, there was a late bounce after White House economic advisor Larry Kudlow denied that a meeting had been planned, other than next week’s scheduled visit by Chinese Vice Premier Liu He.
 
Slowing growth
 
But the real story behind the headlines is the ongoing slowdown in Chinese economic growth. This has been happening for some years now and began well before the US imposed tariffs on Chinese imports. Nevertheless, any moves that crimp trade between the two nations can only exacerbate the deceleration in Chinese economic growth and this is affecting countries throughout the Asian Pacific region as well as exporters of high-end tech manufacturing equipment like Germany. On Monday, fourth quarter GDP posted a rise of 6.4% annualised, its weakest rate since early 2009. This took overall GDP for 2018 to 6.6% which is the lowest rate of Chinese growth since 1990.
 
Warning from President Xi
 
China has taken steps (both fiscal and monetary) to offset the growth slowdown by lowering taxes and boosting liquidity. However, there is a limit to how effective such measures may be in countering a powerful cyclical slowdown. This is particularly the case given the high levels of debt that already exist. Chinese policymakers know this and on Monday President Xi Jinping warned of tough times ahead, saying that the economy faces deep and complicated changes. Speaking at a Communist Party meeting in Beijing President Xi also issued a warning about the need to maintain "political stability" while redoubling efforts "to prevent and resolve major risks".
 
Sterling rallies
 
Meanwhile, the British pound flew higher in early trade and built on these gains as the session progressed. The first part of the rally took the GBPUSD back above 1.3000 as traders celebrated moves by opposition MPs to block any chance of a ‘no deal Brexit’. However, this has come on the back of solid gains since the beginning of January and the latest bounce has forced many short-sellers to cover their positions which has added to sterling’s upside move. At the same time, there’s a belief that Brexit hard-liners on the Conservative benches, as well as the DUP, may be prepared to back Prime Minister Theresa May’s deal if she manages to obtain a time limit on the Northern Ireland ‘backstop’ from the European Union. If so, this could be a major turning point in Mrs May’s fortunes and give her the necessary number of votes to get a deal through Parliament. That would be a stunning turnaround given the scale of her defeat last week. This would give the UK a deal to leave the EU on March 29^th so avoiding a troublesome delay of Article 50 or a second referendum. Obviously, there’s still a long way to go.
 
 
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