Back To Macro?

The US-China trade conflict and then US-Iran confrontation distracted investors from the macroeconomic drivers of the capital markets. It is not that there is really much closure with the exogenous issues, but they are in a less challenging place, at least on the surface. 

A Chinese delegation, led by the Vice-Premier Liu He, who spearheaded the negotiations, will participate in the signing ceremony on January 15.. While China has agreed to buy $200 billion more of US goods over the next two years, they were prepared to do this or something similar more than a year ago with the trade deal that Treasury Secretary Mnuchin had struck but that President Trump rejected. And don’t forget that in 2017, China-US business deals secured on Trump’s trip to Beijing heralded as much as $250 billion seems illusory.

Moreover, the new agreement violates the spirit if not the letter of the WTO, which seeks to avoid narrow preferential treaties. In some ways, the US secured a sphere of influence: Based on a political decision, the US share of China's import market will increase and increase substantially at the expense of the market share of other countries. And for the record, during most of 2019, China's imports were falling. 

There is little reason to believe that the Iranian missile strike on Iraqi-bases that housed US forces brings meaningful closure. However, as with the US-China Phase 1 the trade agreement, the cessation of hostilities should not be confused with peace. There was little chance of a Phase 2 agreement with China. Chinese officials have said as much. President Trump recognized the same and suggested that such a deal may come in "his second term."  

Iran's national self-interest, as determined by its political and religious elite, brings it in opposition to the US. The recent events will likely reinforce the idea that it needs nuclear weapons to protect its sovereignty. The market may price a greater risk premium for oil, and the first test of its assessment may come as the Feb WTI contract approaches the 100 and 200-day moving averages (~$57-$58 a barrel). The March Brent contract has tested its 200-day moving average (~$64.30), while the 100-day moving average near $62.50.  

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Read more by Marc on his site Marc to Market.

Disclaimer: Opinions expressed are solely of the author’s, based on current ...

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