Will Stock Markets continue to rally, mounting on US-China Trade optimism?

Team Veye | 21-Jan-2019 Stock Markets continue to rally

The stock market closed higher for the 4th consecutive day on Friday following media reports that stoked hopes for progress in trade talks between the U.S. and China. The S&P/ASX200 Index strengthen by 1.8% during the last 4 days, giving investors the much needed respite after almost 2 months of bloodbath during Nov & Dec’18.

The Dow Jones Industrial Average DJIA, +1.38% rose 336.25 points, or 1.4%, to end at 24,706.35 for a weekly gain of 3%. The S&P 500 index SPX, +1.32% advanced 34.75 points, or 1.3%, to 2,670.71, gaining 2.9% for the week. The markets in Asia surged, led by a 1.4% jump for China’s Shanghai Composite Index SHCOMP, +1.42% In Europe, the Stoxx Europe 600 SXXP rose 1.8%. Crude oil traded 3.25% higher, while gold settled weaker at -0.85% and the U.S. dollar was firmer at +0.30%.

This upbeat momentum was reinforced by a Bloomberg report last week that China had offered to increase imports from the U.S. by $1 trillion over the next six years, a plan that would reportedly bring the U.S. trade deficit with China to zero by 2024. This was followed by another report from The Wall Street Journal published on Thursday stating that U.S. officials were debating lower tariffs on Chinese imports to give Beijing an incentive to make deeper concessions over the trade dispute. However, a Treasury spokesman disagreed with the report, telling the newspaper that any bargaining positions were at the discussion stage. The source also said neither Treasury Secretary Steven Mnuchin nor U.S. Trade Representative Robert Lighthizer has made any specific trade-related recommendations and talks were still on-going. So, this uncertainty is may last longer and the biggest risk to global markets remains the unresolved US-China trade war, and whether the two economic powerhouses can agree on a trade deal before their 90-day ceasefire expires in early March.

In parallel, the U.S. government’s partial shutdown entered its 28th day with no sign of resolution amongst warnings that a prolonged political standoff will hurt economic performance.

But well, the uncertainty doesn’t end here as on the domestic front, the Australian Banking Royal Commission is scheduled to table its final report during early Feb’19. The big four banks — Commonwealth Bank, Westpac, NAB and ANZ — have already lost $67 billion in value with a plunge in their share price collectively, since the public inquiry and the final report may trigger some market volatility again.

This is scheduled to be followed by another major event in the form of Federal Elections in Australia expected to be held in May’19 especially on the back of some concerns around possible policy changes like capital gains tax discount, negative gearing and franking credit refunds, but it is likely that the election results will bring more certainty.

So, our analysts reckon that the investors may still experience some uncertainty in the markets during the first half of 2019 and it would be wise to remain cautious about any sudden developments and instead of getting driven by the optimism that is currently prevailing.


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