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European Stocks Inched Up Early Thursday On China Trade Deal Optimism And Recovere

By iFOREXMarket OverviewApr 18, 2019 07:20AM ET
European Stocks Inched Up Early Thursday On China Trade Deal Optimism And Recovere
By iFOREX   |  Apr 18, 2019 07:20AM ET
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On early Thursday, the Stoxx-600 slips almost -0.36% to a low of 388.16 on terrible German manufacturing PMI at 44.5 in April and renewed North Korean tensions. But it recovered on renewed China trade deal optimism. There was a report late Wednesday that China trade deal by late May or early June.

Also, the overall impact of terrible German PMI was limited as China is recovering steadily and EUR tumbled on soft German PMI, positive for the export-heavy European stocks. Again, lower German Bund yield as a result of soft German PMI is negative for banks & financials. Italy tumbled after Italian after central bank warned that it's budget/fiscal deficit is likely to be much wider than agreed with the EU in the next couple of years. But upbeat report card from Nestle and Unilever (LON:ULVR) helped to some extent.

As per reports: “The US and China set a tentative timeline for next round of trade talks. The U.S. and China have tentatively scheduled a fresh round of face-to-face meetings as they seek to close out a trade deal, with negotiators aiming for a signing ceremony in late May or early June”.

The report also suggested that “Lighthizer will travel to Beijing on April 29 and his counterpart Liu He will travel to Washington a week later. Talks are continuing, and U.S. and Chinese officials have missed previous deadlines aimed at finishing a deal. But if the senior officials succeed in reaching an accord, then officials from both countries could spend a couple of weeks wrapping up the agreement's text and legal language before a hoped-for presidential signing ceremony as soon as Memorial Day”. But the overall impact was quite limited as a tentative China trade deal was almost discounted. Meanwhile, Trump said that trade deal with China is moving along quite well, has a feeling it will be successful.

There was another report that “Chinese officials are identifying international travel dates on Trumps' calendar that might offer the potential for a summit off US soil. Trump is already planning to be in Japan at the end of May for the G20 summit”.

Previously there had been a report that Xi may visit the US but the feeling among Chinese officials is that they can't risk committing to a summit and losing face if Trump makes last-minute changes to the deal like his infamous walk-away from Kim (NK) summit a few months ago.

Further on early Thursday, China's commerce ministry said there has been new progress in negotiating the text of the US-China trade deal. Another report by SAFE also suggests that China's current account may continue a surplus in the first quarter as exports of goods and services remaining strong. In any way, as a result of renewed China trade deal optimism, the Stoxx-600 is now off the session low and currently trading around 390.80, inched up +0.31%; it made a session high of 391.08 (8-months high).

On late Wednesday, North Korea said it had tested a new tactical weapon, in an unconfirmed move that comes as Trump and Kim remain at an impasse following the failed Hanoi summit. As per reports, Kim personally had overseen the test of the new tactical guided weapon. KCNA said the weapon was designed to carry a “powerful warhead” and that its completion was an event of “very weighty significance in increasing the combat power of the People’s Army”.

Although NK did not specify what type of weapon was involved in the test, leaving it unclear whether it was a missile, experts said the description appears to rule out a ballistic missile, meaning the test does not violate NK’s self-declared moratorium. But it is the first weapons test since President Trump's summit with Kim in Hanoi in February and a sign of public defiance by Kim following a stalemate in the high-stakes denuclearization talks (partial waiver in lieu of partial denuclearization).

For NK, even the SK President Moon tried to convince Trump to waive off partial NK sanction for the ease of civilian life, but Trump is no ready to compromise anything short of full denuclearization, which Kim is not ready to do either without any partial sanction waiver. Apparently, there is a lack of trust between the two leaders (Trump and Kim) and thus NK nuke/missile issue will a harsh reality in the coming days, negative for the USD. For Trump, lingering NK issue may be also a great weapon to keep USD lower time to time as Trump has actually launched an FX war in the disguise of China/NK cold war.

European stocks inched up Wednesday on Goldilocks Chinese economic data:

The European market (Stoxx-600) closed around 389.58 Wednesday, edged up +0.10% on Goldilocks and better-than-expected Chinese economic data, which diminished the concern of synchronized global contraction narrative. As Chinese slowdown due to Trump trade war and domestic deleveraging was the main reason behind sudden global gloom & doom, upbeat economic data may be a great relief for the global economy, especially for the export savvy European market. Europe is now one of the biggest trading partners of China and Chinese consumption is great support for the export-heavy economy like Germany.

As a result of renewed China optimism, German Bund yields made a high of +0.102% on Wednesday, at 4-week high and well-off the recent low of -0.055% (negative yield). European banks were upbeat on higher Bund yields, while automobiles jumped as China is a big customer of expensive car models for European automakers, exported directly or indirectly through the US. But the overall risk-on optimism was also undercut by muted GDP growth forecast by Germany.

On Wednesday, Germany’s Economy Ministry drastically slashed the 2019 GDP growth forecast to a mere +0.5%, just halved of January’s projection of 1.0% that would be the slowest growth in six years. The German government projection of +0.5% GDP growth in 2019 is even less than the latest IMF projection of +0.8% and much less than the actual 2018 GDP growth of +1.5% (y/y). In Q4-2018, the German economy actually contracted by -0.2% on a sequential basis (q/q) and is on the threat of a technical recession.

The German Economy Minister Altmaier basically blamed some external factors such as Trump trade war (both on China and the EU), lingering Brexit uncertainty (negative for German exports to the UK) coupled with some domestic factors like introduction of the new car emission regulations and even an unusually low Rhine water levels for the unprecedented economic slowdown. The German economy ministry also noted that the global economy should regain some momentum ahead and also pointed out lower/ neutral net trade (less export and more import) behind the soft GDP number.

On the China economic data front, the much awaited Q1-2019 GDP came unchanged at +6.4%, slightly higher than the expectations of +6.3%. On sequential basis (q/q), the Q1 GDP edged down to +1.4% from prior +1.5%, but right on the expectations of +1.4%. The Chinese fixed asset investment for March edged up +6.3% from prior +6.1%, right on the expectations of +6.3%. The Chinese industrial production jumped to +8.5% in March from prior +5.3%, and higher than the expectations of +5.6%. The Chinese retail sales also surged to +8.7% in March from prior +8.2%, higher than the expectations of +8.3%. The Chinese unemployment rate also edged down to 5.2% from prior 5.3%.

The upbeat Chinese economic data in March may be a result of $300B targeted Chinese stimulus, a reflection of better sentiment amid significant progress of the US-China trade deal negotiations. As per reports, China also encouraged it's active communist party workers/MSMEs to take cheap loans from banks to stimulate their small business amid Trump trade war.

Overall, despite upbeat and just/well above the market expectations, the market is still skeptical (as usual) about the veracity of Chinese economic data, especially GDP and Industrial Productions amid subdued electricity consumption and land/real estate purchase data. In any way, an upbeat Chinese data may be also bad news for the stimulus-addicted stock market and thus the overall impact of the positive Chinese data was quite limited.

On Tuesday, the OECD warned that China at a crossroad and should lower external and internal barriers.

In its survey report, the OECD said: “China is at a crossroads, facing serious domestic and external challenges to maintaining its strong position over the long-term. Thus policy should seek to ensure a better functioning economy that delivers stable and inclusive growth for all. China should aim to further lower import tariffs and dismantle non-tariff barriers and barriers on the entry and conduct of foreign firms, in particular requirements to form joint ventures or transfer technology. Also, the ongoing fiscal stimulus should avoid directing credit to state-owned enterprises and local governments”.

OECD further added: “There is wide scope to improve efficiency across the Chinese economy, notably by reducing the internal barriers that hinder product market competition and labor mobility. And measures include stronger protection of intellectual property rights; gradual removal of implicit guarantees to state-owned enterprises, allowing them to default; and reduction of state ownership in commercially-oriented, non-strategic sectors”.

The overall risk-on sentiment was also affected by lingering suspense about the US-China trade war/truce. On late Monday, the White House CEA/NIC Kudlow said: “Negotiations over complaints that China has predatory technology policies were going very well and making good progress. We're not quite there yet. We've still got some open issues. Currency reforms look very good, for example, there's been progress on enforcement. Just pretty much across the board. I think the key here is steady conversations, steady conversations since they were here”.

On Tuesday, Kudlow reiterated as a part of a daily ritual to keep Dow stable on China trade optimism: “We are continuing to make good progress across the board on China deal and China trade talks will continue this week, while everything is on the table”. Further, there was a report late Tuesday that the US Department of Commerce issues affirmative preliminary antidumping duty (ADD) determination on steel wheels 12 to 16.5 inches in diameter from China. Dow slips in late hours trading after this report of ADD on certain China steel wheels.

But overall, the market is optimistic about the US-China trade deal as China is now eager to avert further slowdown and Trump is also desperate to have a tentative China trade deal ahead of the 2020 election and also to avoid an imminent recession in the process amid visible US economic slowdown.

As per reports, talks between the US and China are progressing with a compromise on key agricultural goods with soybeans in the main focus. Trump is eager to claim any eventual trade deal as a victory for American farmers ahead of the 2020 election.

The market is also concerned about an impending trade war between the US and the EU despite European negotiators got the green light this week to get started on trade negotiations with the US, targeting a deal by September. On Monday, the EU gives final greenlight for trade negotiation with the US, except red-line in agriculture.

The EU Council gave the green signal to start formal trade negotiations with the US on two agreements. One is a trade agreement strictly focused on industrial goods, excluding agricultural products. The other is on conformity assessment to make it easier for companies to prove their products meet technical requirements on both sides of the Atlantic. According to a European Commission analysis, the first agreement would increase EU exports to the US by 8% and US exports to the EU by 9% by 2033. That is additional gains of €27 billion and €26 billion in EU and U.S. exports respectively.

The EU Commission President Juncker said the EU is delivered what he has agreed with Trump on July 25, 2018. Juncker added: “We want a win-win situation on trade, beneficial for both the EU and the U.S. Notably we want to slash tariffs on industrial products as this could lead to an additional increase in EU and U.S. exports worth around €26 billion”.

At a news conference, the EU Trade Commissioner Malmstrom said: “I will reach out as soon as they wake up in the U.S…. and see if can have more clarity on when we can meet to have the first talks on this… We are ready as soon as they are…We are definitely determined to do everything we can to finish this during the Juncker Commission. (Juncker’s term ends on October 31). But agriculture is certainly not a part of the negotiations. And, this is a red line for Europe and you’ll not find any mention of this in our mandate”.

The European market sentiment was also affected by lingering Brexit uncertainty despite Easter breakups.

On Tuesday, the European Council President Tusk said: “On both sides of the Channel, everyone, including myself, is exhausted with Brexit, which is completely understandable. However, it’s not an excuse to say let’s get it over with, just because we’re tired. The UK cannot be treated as a 2nd class member of the EU and the EU Parliament should respect the UK rights as a member state”.

Responding to a letter by an EU leader which has warned “Dreamers not to think Brexit could be reversed and the dream of reversing Brexit is unrealistic”, Tusk said he personally thinks that Brexit could be still reversible: “At this rather difficult moment in our history, we need dreamers and dreams. We cannot give in to fatalism. At least I will not stop dreaming about a better and united Europe.”

However, the European Commission Juncker said: “It was not my working assumption that Brexit could be reversed or extended beyond a new Oct 31 deadline. The EU is on Brexit break, focusing on (other) positive agenda for Europe. We are ready for a no-deal Brexit, but we have nothing to gain from it and we will never kick out a member state. When the UK leaves the EU is in London’s hands, but the EU27 should have a right to meet without the UK, while the UK remains a member of the EU”.

Juncker has a known soft heart for the UK/Theresa May and is due to retire after October’19, emphasizing the UK to take part in the EU election to remain an EU member state till at least the actual divorce (Brexit). But this is a red line for Eurosceptics and also a good strategy on the part of the EU so that the British politicians could be forced to take a firm decision on Brexit. In any way, the EU election is also being viewed as a 2nd referendum on Brexit.

Although Tusk and Juncker sound sympathetic on Britain, the overall Brexit sentiment was dragged by a report that local UK Conservative party chairmen are circulating a petition which seeks an EGM to pass a no-confidence vote in PM May. The report also suggested that the party will be obliged to hold a meeting if more than 65 association chairmen sign the motion; so-far around 40-50 has signed it, with expectations that the threshold could be passed next week.

On Wednesday, the Swiss Power equipment maker ABB jumped on hopes of a speedier turnaround after its CEO Spiesshofer resigned the board, Chip maker ASML surged on upbeat guidance amid a forecast of faster growth due to solid demand from China. Also, late Tuesday’s Qualcomm-Apple settlement boosted the overall EU chip makers and techs. Swedish telecom giant Ericsson (BS:ERICAs) also helped techs on the upbeat report card (earnings and guidance) amid an improved outlook for the global network market.

But healthcare dragged the market amid growing regulatory headwinds in the US, which may also affect the EU healthcare regulations. Basic resources dragged as BHP tumbled after slashing its iron ore production output, just a day after its peer Rio Tinto (LON:RIO) cut its output guidance.

The British grocery/retail business distributor Bunzl (LON:BNZL) plummeted on terrible guidance after it said that the Q1 growth was sluggish as its core business remained subdued in North America, its biggest market. The French food/milk giant Danone crumbled as Q1 sales slowed on muted demand for infant milk formula products in China coupled with a consumer boycott in Morocco. Valmet plunged on analysts’ downgrade amid the concern of muted order and cash flow.

On Wednesday, after a subdued start, European stocks pushed into positive territory on reports China was considering even more stimulus measures to bolster consumption, with autos the notable outperformer, shrugging off weak sales numbers.

Germany’s DAX-30 surged +0.43% to close around 12153.07, almost at the mid-levels of session low-high of 12086.89-12195.00 in a day of moderate volatility. DAX-30 jumped +0.92% for the current week (till now) amid China trade deal and smooth/soft Brexit optimism. Germany was boosted by basic resource materials, techs, foods and beverages, financials (led by Wirecard) and automobiles while dragged by pharmaceuticals & healthcare and telecoms.

France’s CAC-40 jumped +0.62% to close around 5563.09, near the session high of 5569.28 (11-months high); earlier it made a low of 5522.61. France was helped by financials, basic resources & materials, and utilities, while dragged by healthcare/pharmaceuticals (Sanofi (PA:SASY)) and retailers (Carrefour (PA:CARR)).

Italy’s FTSE MIB-40 inched up +0.37% to close around 22000.88, near the session high of 22055.50 (at the 8-months high); earlier it made a low of 21889.06.

Britain’s FTSE-100 ticked up +0.02% to close around 7471.32, near the session high of 7478.95 (almost at the 6-month high); earlier it made a low of 7445.12. Britain was helped by exporters/MNCs as GBP was under stress amid lingering Brexit/political uncertainty and muted inflation. Mining stocks were under pressure on subdued output guidance by BHP and Rio Tinto coupled with a report that Vale may reopen its Brazilian mine, while Asia focused banks & financials (HSBC, Prudential (LON:PRU)) helped on China optimism & higher Bund yields. Energies also dragged the market as oil stumbled on renewed Russian talks and OPEC+ cut extension uncertainty.

Technical View (DAX-30, CAC-40, MIB-40, and FTSE-100):

Technically whatever may be the narrative, DAX-30 has to sustain over 11850 for a further rally to 11930*/12055-12105/12220 and 12285/12450-12600/12650 in the near term (under bullish case scenario).

On the flip side, sustaining below 11835-11750/11670*, DAX-30 may fall to 11500*/11395-11275/11200 and further 11150/11000-10850/10770 in the near term (under bear case scenario).

Technically whatever may be the narrative, CAC-40 has to sustain over 5475 for a further rally to 5515/5555-5605*/5675 and 5715-5855 in the near term (under bullish case scenario).

On the flip side, sustaining below 5450-5400/5330*, CAC-40 may fall to 5295/5235-5200/5170* and further 5140/5100-5070/4995 in the near term (under bear case scenario).

Technically whatever may be the narrative, MIB-40 has to sustain over 21050 for a further rally to 21315*/21485-21615*/21745 and 21925/22070-22200/22375* in the near term (under bullish case scenario).

On the flip side, sustaining below 21000/20890-20750*/20600, MIB-40 may fall to 20500/20450*-20325/20225 and further 20100/19950-19890*/19800 in the near term (under bear case scenario).

Technically whatever may be the narrative, FTSE-100 has to sustain over 7305 for a further rally to 7350*/7440-7520/7600 and 7715-7885 in the near term (under bullish case scenario).

On the flip side, sustaining below 7285, FTSE-100 may fall to 7170/7110-7025/6995 and further 6950*/6925-6865/67885 in the near term (under bear case scenario).

European Stocks Inched Up Early Thursday On China Trade Deal Optimism And Recovere

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European Stocks Inched Up Early Thursday On China Trade Deal Optimism And Recovere

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