U.S., China Trade Détente Lifts Stocks Across The Board

Oil prices and stocks have got off to a flier this week, both surging strongly on the back of the weekend agreement between the US and China to defer any further increases in tariffs, while the rebound in the oil price has been helped by the decision by Canadian producers to cut output by 325k barrels a day, along with an expectation that Saudi Arabia and Russia have agreed to extend their oil deal to manage supply, raising expectations of an output cut which could be confirmed at this week’s OPEC meeting.

In a sea of green, European stocks looking set to post their best one day gains since April with the best performers being basic resource and oil stocks led miners Anglo American (LON:AAL) and Antofagasta (LON:ANTO) as the dialling back in confrontation prompts a surge of optimism that could well see a decent rebound into the Christmas break.

Sentiment has also been helped by a more constructive tone between Italian and EU officials over the small matter of the Italian budget. The divisions remain as wide as ever, however their does appear to be a less confrontational tone which is helping push Italian yields lower and Italian stocks higher.

In company news Unilever (LON:ULVR) has confirmed that it will purchase the Indian Horlicks unit from GlaxoSmithKline (LON:GSK), a move that was flagged last week. The deal is expected to cost €3.3bn and is expected to include the health drinks portfolio of Glaxo in India and Bangladesh in which it will acquire an 82% stake in the business.

While today’s rebound is no doubt welcome there is no escaping the fact that economic activity in Europe is showing further signs of weakening after the latest manufacturing PMI’s showed further lacklustre activity, with the latest Italian manufacturing survey showing the sharpest deterioration in four years, sliding to 48.6, a four year low, from 49.2 and the second successive monthly contraction.

The latest German and France manufacturing numbers showed a modest improvement from last week’s flash numbers, ticking up to 51.8 and 50.8 respectively, however they can’t disguise a wider malaise with German manufacturing hitting a 31 month low. There was a silver lining as Spain showed an improvement to 52.6, but nonetheless the broader tone remains weak with the recent economic disruptions in France likely to act as a further drag on the French economy in Q4.

On the currencies front the US dollar index has slipped back across the board with the best gains in the commodity currencies, led by the Australian and Canadian dollar as demand for US dollars diminished on the back of the trade détente agreed between the US and China at the weekend.

The pound continues to underperform weighed down by a dysfunctional political environment as the various sides of the Brexit debate kick around various scenarios about what steps to take in the event that Theresa May’s Brexit deal with the EU fails to get passed.

On the data front the UK economy continues to hold up fairly well with manufacturing PMI for November coming in at 53.1, a significant improvement on October’s 51.1.

The slide in the US dollar has also been exacerbated by perceptions of a slight change of tone from the US Federal Reserve as senior policymakers adopt a slightly more dovish outlook on the pace and scope of additional rate rises into 2019.

Last week’s comments from a number of senior Fed officials including Fed chair Jay Powell appear to have given the central bank much more room for manoeuvre in terms of tempering expectations for next year, and it would be surprising if today’s speeches from Fed vice chair Richard Clarida, Randal Quarles, Williams and Lael Brainard were to muddy the waters further.

On the companies front Ford (NYSE:F) is expected to release its latest sales and revenue numbers for November.

Last week the latest Chicago manufacturing PMI numbers for November showed a big jump to 66.4, an 11 month high, after a disappointing October, with new orders rising to a four year high. If today’s ISM manufacturing number shows a similar resilience it will once again reinforce the belief that despite some weakening in the latter part of this year, the US economy continues to remain strong.

US markets look set to continue the positive theme from Friday’s rally with more strong gains as they tack into the strong winds from strong Asia and European sessions.

Dow Jones is expected to open 490 points higher at 26,028

S&P500 is expected to open 50 points higher at 2,810

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