Investors pile into stocks as 'phase 1' of trade-deal announced

Risk-on in financial markets

Risk-appetite surged on Friday, after the US and China announced a 'partial' trade deal, which includes a delay of the next round of tariffs, in exchange for a series concession from China relating to its economic policy. That sent stocks climbing, and safe havens tumbling. Brexit development also whetted risk appetite, as hopes grow for a better than expected resolution to that geopolitical issues. Oil prices also climbed, as tensions in the Middle East ratcheted up again. The week ahead, from a global perspective, will see US earnings take focus. While locally, jobs data and Reserve Bank of Australia (RBA) news will dominate headlines.

A partial US-China trade-deal

There were rumblings leading into Friday’s trade that it was coming, but the official (enough) announcement of a trade-war truce between the US and China sent stocks speeding into the week’s close. Framed as 'phase 1' of a several part trade-war treaty, China: pledged to reform some of its intellectual property laws, allow US financial services greater access to Chinese markets, and promised to purchase vastly greater quantities of US agricultural products. In return, the US will delay the tariffs that were scheduled to be hiked this week. While both sides agrees to work towards a pact regarding foreign exchange intervention.

Investors jump into stocks on trade-truce

What’s being deemed a trade-war breakthrough sent investors charging into the stock market. Granted, that move was already building for the better of last week. But the confirmation of some kind of trade-war de-escalation saw volumes jump in Wall Street stocks, pushing the S&P 500 1% by the close of North American trade. It must be said, the move did get 'faded' somewhat in the dying moments of Wall Street’s trading session, after it was revealed that no agreement had been reached regarding Huawei, nor the planned tariff hikes in December. Nevertheless, the US-China trade-truce, just as it is, ought to the ASX 200 open 34 points higher today.

Brexit negotiations possibly turning corner

Positive Brexit developments also piqued risk appetite on Friday. At least on the surface, it appears that the UK and EU are inching closer to striking a divorce deal. This comes after a meeting between UK Prime Minister Boris Johnson, and his Irish counterpart, Leo Varadkar, stated 'we can see a pathway to a deal'. The details, somewhat like the trade-truce, are still a touch vague. Nevertheless, investors have run with the positive sentiment. The Pound leapt into the 1.26 handle on Friday. And, with support from the US-China trade news: the DAX rallied nearly 3%, and the FTSE 100 added almost 1%, in European trade.

Tensions in Middle East contribute to oil’s spike

In another geopolitical story: tensions in the middle east have inflamed again, contributing to a spike in oil prices on Friday, on reports an Iranian oil tanker had been attacked by allegedly Saudi forces. The move sparks a small escalation in the stand-off between Iran, Saudi Arabia, and their respective allies, raising the prospect, modestly, once again, of disruption in production and supply of oil into global markets. Based on the facts of this situation alone, however, there appears no immediate risk to oil prices. Hence, one ought to expect oil to return to trading largely in-line with concerns about global growth.

US reporting season commences, expected to be soft

US reporting season commences this week, and will bring investors back to what may prove to be cold, hard fundamentals. Earnings-per-share growth across the S&P 500 is being forecast to have contracted by nearly 4% last quarter. Though corporates very rarely do anything but exceed earnings estimates, likely that this US reporting season will show a third successive quarter of negative annualised earnings growth. With all this negativity practically baked-in to the market, investor attention will be primarily concerned with the outlook in the year ahead. The burning question: how do corporates view US economic growth, and how might that impact future earnings?

Locally, we have the RBA and jobs data

Australian investors get the opportunity for a health-check and status-report on the domestic economy this week. Tuesday will welcome the release of the RBA’s minutes from its last meeting – at which, of course, the RBA opted to cut interest rates, again, to a new record low – before focus turns to local jobs numbers on Thursday. An update: as this US-China trade-truce eases fears about a global economic slowdown, another cut by the RBA at its next meeting is considered a 1-in-3 chance. Steadiness in the job market will probably see those bets deferred, while signs of growing slack will undoubtedly see them increased.