US-China positivity but will March come in like a lion and go out like a lamb?
Neil Wilson • 3 min read
European equities got off to a positive start to the week as US-China trade optimism had the necessary effect on risk sentiment, taking their cue from a solid Asian session and the positive close on Wall Street on Friday.
Reports over the weekend signal that the two sides are moving rather more rapidly to a deal than we maybe thought. Trump has called for China to remove tariffs on US farm products because talks are going so well. Reports suggest Trump and his Chinese counterpart could sign a deal later this month. The fact that this would be at Trump’s gaff in Florida rather than outside the White House tells you a lot.
But with all this positivity comes the risk that the market is buying on this rumour mill and is becoming more exposed should the good news not materialise. March could well come in like a lion and go out like a lamb?
It’s been a strong start so far, and usually the Mar-Apr period is a good one for stocks. But the rapid ramp up in the market over the first two months of the year, there is the prospect of a fallout.
The FTSE 100 is up close to 6% YTD but keeps coming back to 7100 and for now doesn’t much like the 7200 handle. This could change if the pound weakens further on any Brexit-related developments. On that front we see ‘progress’ towards a delay but no meaningful shift in the terms of the deal or the stance of the main players. However as the clock ticks down there is the sense that the Brexiters are being squeezed and ultimately Parliament will go for May’s deal even if it is with a no-deal gun to their heads. The blue chip may also make a stab at 7200 again on broader trade optimism and risk sentiment improvements.
The S&P 500 is up almost 12% YTD on really strong breadth but momentum is starting to fade and there are signs stocks could be a shade overbought. SPX has run into resistance around 2800 and this is proving to be a battleground. The broad market has failed so far at breaching key resistance on the upside. As we detailed last week, look for the Oct-Nov twin peaks topping out at 2817 for the key upside move – we need a close above that to suggest a push back to all-time high territory is on. That is also sitting pretty much bang on the 78% retracement of the rout late last year from the all-time highs to the Christmas lows. Certainly if a trade deal is done, ATHs are on again but until we see the ink dry there is a real risk on the downside.
And it’s a very big week ahead…
Nonfarm payrolls come on Friday, with the focus as ever on the wage growth as much as it is on the headline jobs number and unemployment figures. Wages rose just 0.1% month on month in Jan, the slowest pace of growth in some time. Forecast jobs number is 180k, with unemployment seen at 3.9%, having risen to 4% in Jan.
It’s also ECB day on Thursday, where we’d expect the central bank to start to acknowledge properly that this economic indicators are suggestive of a slowdown in growth that is more than just temporary. The press conference by Mario Draghi will be closely watched for anything about delaying rate hikes – surely the consensus on the Governing Council has to be for more easing before there is any further tightening? No change in policy is expected but we may see some more dovish language.