Insights Investment

• The US and China signed a ‘phase one’ trade deal on Wednesday that signaled a potential end to ongoing trade tensions between the two countries. The agreement contains a promise by China to spend at least $200bn on US goods and services over the next two years, stricter rules on theft of American intellectual property and a pledge by China not to manipulate its currency. However, the market reaction was muted as the deal fails to address major flashpoints of previous US-Chain tensions such as commercial cyber theft and China’s use of industrial subsidies. The 10-year Treasury ended the week 2bp higher.

• In US credit, corporate spreads were unchanged as tight valuations limited gains from the US-China trade deal announcement. Earnings season kicked off with strong results from US banks and is set to continue with industrials reporting accelerating next week. Apart from the banks, there was limited new issuance with SQM, Western Gas, EQT and Blackrock.

• In European government bonds, the heavy issuance from last week continued with Belgium, Spain and Italy all coming to market. The €32.5bn issuance this week has been well absorbed with the 10-year Spanish issue garnering over €53bn of orders, surpassing the previous record of €47bn. Italy, Belgium, Cyprus and Ireland also saw record demand for their recent issuances as well, indicating healthy investor demand for positive-yielding European bonds (see chart below). In bond yields, the UK was the main mover this week with 10-year gilt yields falling 13bp on the back of soft UK inflation and GDP data.

• In emerging markets, there was positive economic data out of China as Q4 GDP of +6.0% year-on-year was in line with expectations while retail sales, industrial production and fixed asset investment all surprised to the upside. The news caused the Chinese yuan to strengthen to a six-month high of 6.8660 against the US dollar.

 Chart of the Week: Spanish yield premium over Germany tightens (Spain-Germany 10-year yield spread)

Source: Bloomberg and US Bureau of Labor Statistics. Data as at January 17, 2020.

Source: Bloomberg, January 17, 2020

Economic calendar

January 21: US unemployment, EU ZEW economic sentiment index
January 22: US housing prices and existing home sales
January 23: ECB meeting, US jobless claims
January 24: EU/US flash PMI data

• US-Iran tensions escalated at the end of last week due to the assassination of Iran’s top military commander Qassem Soleimani. Markets reacted sharply to the event, with Brent crude oil prices reaching $69/bbl during the week, but they have since returned to the levels prior to Soleimani’s death at $66/bbl. After the assassination, US sovereign debt rallied over the week, with 10-year Treasury yields down almost 9bp on Monday. Tensions seem to have eased but the situation remains uncertain.

• In the US, payrolls increased by 145,000 in December and unemployment stayed at 3.5%. The services purchasing managers’ index (PMI) was revised up to 52.8, the highest reading since July. In US credit, spreads were marginally wider as a wave of new supply and some early-year selling from Asia offset the improving geopolitical backdrop. New issuance was over $60bn, the fourth-busiest week in history with over 50 companies issuing, including numerous European banks, Energy Transfer Partners and Western Gas, along with issues from Indonesia and Mexico.

• In European markets, Italian spreads tightened at the end of the week partly driven by lack of supply and also as headlines emerged about the reduced likelihood of a referendum on constitutional reform. In Spain, political uncertainty waned as a coalition deal was agreed, though this raised the prospect of past labor and pension reforms being reversed. In the UK, outgoing Bank of England Governor Mark Carney mentioned that interest rates may be cut in the future. This led the pound to drop over Thursday night but the currency recovered on Friday.

• In European credit, there was a flurry of new issuance to start the year, led by several financials at the start of the week. Spreads of new issues outperformed the secondary market. The eurozone services PMI was revised up to 52.8 meaning that the composite reached 50.9, the highest since August when it reached 51.9.

• In emerging markets, the year started off with strong inflows, with JP Morgan reporting US$1.7bn in inflows to bond funds, with the majority (US$1.1bn) into hard currency funds and an additional US$1.1bn into equity funds. Volatility in oil markets benefited oil producers such as Russia but at the expense of importers such as Turkey. Markets will be closely watching the central bank of Turkey next week, with forecasters expecting a 50bp rate cut. Meanwhile, China’s car sales fell for the second year in a row, with a fall of 7.5% in 2019.

 Chart of the Week: The price of Brent crude oil ($/bbl)

Source: Bloomberg and US Bureau of Labor Statistics. Data as at January 10, 2020.

Source: Bloomberg, January 10, 2020

Economic calendar

13 January: UK GDP, trade balance, industrial and manufacturing production
14 January: US CPI, China trade balance
15 January: UK and France CPI, RPI and PPI, US mortgage applications and PPI, signing of US-China phase one trade deal
16 January: EU27 new car registrations, German CPI, US retail sales and jobless claims
17 January: China Q4 GDP, retail sales and industrial production, UK retail sales