The Week Ahead- Saturday, Feb. 23

After a dismal end of 2018, investors are faring better through the first two-thirds of Q1 19. Equity markets have recouped a good part of the late-2018 decline. Bond yields, however, have not returned to where they previously were. The tightening of financial conditions, which  was both the cause and effect of heightened anxiety among investors and spooked some central bank, have eased considerably. The volatility of stocks, bonds, and the dollar-yen and the euro-dollar exchange rates have fallen. 

While the capital markets are calmer, the underlying uncertainties remain as stark as they were in December. The US and China are engaged in trade talks, and while some agreement is widely expected, the strategic competition between the two remains fierce. The Irish border remains the same vexing issue for Brexit, and after 18 months of negotiating, the risks of a no-deal exit remain palpable. Dutch negotiators have reportedly put the odds at 60%. 

What Brexit and the US-China trade talks have in common is that the self-imposed deadlines are likely to be extended. Before the weekend, Treasury Secretary Mnuchin was quoted on the news wires indicating that an agreement on the yuan had been reached. There were no details and investors did not seem to react much, but whatever the substantive details are, the agreement offers a prima facie case of extending the tariff freeze.   

The length of the extension is a practical issue. When can the two presidents meet? Reports suggest that a meeting could be held at one of Trump’s properties at the end of next month. Investors should not be mistaken. A trade agreement, at best, sets some parameters around the strategic competition. Consider that around the same time that Mnuchin was announcing the currency agreement, Defense Secretary Pompeo was declaring that the US would not share information with countries that using Huawei systems. 

US equities closed on their highs before the weekend, and many attributed it to the optimism on trade. The S&P 500 and Nasdaq closed at their best levels since early November ostensibly on this anticipation. In fairness, both benchmarks have advanced in eight of the past nine weeks and are up 11.4% and 13.4% respectively. Investors have been confident that a deal would be struck and other factors are helping the stock market recover from the sell-off from the record highs made in last Q3 18. 

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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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