The “Phase 1” trade agreement between the US and China, combined with the outcome of the UK elections, reduces policy uncertainty, supporting risk appetite
The US and China reached a “Phase 1” trade agreement on Friday. Recall that the agreement requires “structural reforms and other changes to China’s economic and trade regime in the areas of intellectual property, technology transfer, agriculture, financial services, and currency and foreign exchange”. The deal is expected to be signed by early January.
The agreement is expected to be finalized within the next few weeks, thus diffusing tensions between the two countries. Indeed, the US cancelled its proposed new tariffs of 15% on $160 bn worth of imports from China. Moreover, the US will halve (from 15% to 7.5%) the tariffs that it had implemented as of September 2019 on Chinese imports of goods worth c. $120 bn. However, tariffs of 25% on circa $250 bn worth of Chinese imports will remain in place. Finally, China has agreed to step up purchases of US agricultural products by $30 bn.
In the UK, the general elections resulted in an outright majority for the Conservatives (365 out of a total of 650 seats in the House of Commons). The outcome paves the way for the ratification of the revised Withdrawal Agreement (WA) and Political Declaration (previously agreed on October 17th with the EU), thus removing a source of uncertainty, at least in the short term.
According to the WA, a transition period of maintaining the current status quo in the bilateral relationships will follow, up to end-2020. That period could be extended by up to two years if such a request is made by the UK no later than 30th June. Nevertheless, according to media reports, the UK Government intends to pass a bill that would block any potential delay to the transition period.
Overall, these latest developments could prove constructive and corroborate optimism for a stabilization in global growth in the coming months.
Economic activity will also continue to be supported by the mildly expansionary monetary policy in the US and the ultra-accommodative ones in the euro area and Japan, albeit the prospect of further easing, at least in the short term, has diminished. In the event, the Fed and ECB remained on hold during the past week, while pointing to stable monetary policy in the coming months (see Economics). The Bank of Japan (December 19th) and the Bank of England (December 19th) are also expected to remain unchanged.
Risk appetite was buoyed by the latest developments, with the MSCI ACWI index up by 1.3% in the past week and by a further 0.7% on Monday, reaching a record high. In the UK, the FTSE100 rose by 1.6% wow in the past week and by a further 2.3% on Monday, on the back of hopes for a quick ratification of the WA. Following the outcome of the UK election, the British Pound gained 1.4% on Friday against the euro to €/0.834 and 1.2% against the US Dollar to $1.333, its highest since July 2016 and March 2019, respectively. However, on Tuesday December 17th, the British Pound reversed these gains, as the plans to block any delay to the Brexit transition period led to concerns that the upcoming UK – EU negotiations could prove contentious.