The US-China trade deal is still very much up for interpretation. As details gradually replace bellicose tweets, markets will be looking for actual concessions from the world’s second largest economy in favor of the US, and for solid mechanisms to ensure a more free-floating exchange rate between the greenback and the renminbi. The USD index touched a year-end high vs. a basket of currencies, while the CNY increased in value, albeit slightly, to close the year at 6.8785.
Weakening economic fundamentals in China seem to be forcing the hand of President Xi as his negotiators and their American counterparts hash out a new trade deal.1 Given steady wage increases in China (up 64% since 2011), and a confluence of economic warning signs, many businesses are looking farther afield as they grow.2
US corporates will start off 2019 largely bullish, as 2018 saw that US GDP and payroll growth largely signaled full steam ahead. However, a full slate of major geo-political opportunities contain both head- and tailwinds. FX volatility spiked more than 10% in December.
Stocks indexes around the world mocked commentators who were hoping for a “Santa Claus Rally”, where market optimism pushes stocks up a few notches just before year end. Investors pulled more than $84 billion out of US mutual funds and ETFs in November and December, the largest capital exodus since records began tracking these withdrawals in 1992.3
Brexit continued to garner headlines, but made no progress since UK Prime Minister May pulled a vote at the last minute on her latest version of a divorce agreement to avert an embarrassing loss in Parliament. Her new year message seemed to appeal to the greater British “let’s all pull together” spirit, but given that her most recent round of phone calls to EU members yielded no new concessions from the continent, the March 29 “Hard Brexit” deadline will continue to spur volatile trading sessions.4 To make matters worse, a recent survey found that a full 1/3 of European-based firms plan to cut spending in the UK due to Brexit uncertainty. The UK appears to be shooting itself in the face.5 The GBP continued to weaken into the new year, breaking below 1.26 at present writing.
Brazil swore in its new right-wing president Bolsonaro early in January. While promising “change” to get elected is often seen as passé, the former military commander wasted no time in delivering by withdrawing a pledge to host the next UN summit on climate change, signaling his intent to make gun ownership easier, and opening up what remains of Brazil’s rainforests to gold exploration, for starters. While the first 100 days slip by, voters and markets will try to suss out whether he can deliver or not. BRL largely stayed stable in December in the high 3.80s. Businesses and NGOs are wary of what damage could be done to Latin America’s largest economy.6
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