Picture: REUTERS/ISSEI KATO
Picture: REUTERS/ISSEI KATO

Tokyo — World stocks inched ahead to a record high on Thursday after the US and China signed an initial deal to defuse their 18-month trade war, though financial markets were wary as a number of thorny issues remained unresolved.

MSCI’s broadest index of world stocks firmed 0.04% in early trade after closing at record level on Wednesday while its index on Asia-Pacific shares outside Japan rose 0.21%.

Japan’s Nikkei rose 0.14% while mainland China’s Shanghai composite index was almost flat.

US President Donald Trump and Chinese Vice-Premier Liu He on Wednesday signed a deal that will roll back some tariffs and cause China to boost purchases of US goods and services by $200bn over two years.

“Whether somebody looks at this as big progress or little progress, it is something tangible and so the arrow is pointing in a direction that the market is comfortable with,” said Chuck Carlson, CEO of Horizon Investment Services at Hammond, Indiana in the US.

The Phase 1 deal however does not fully eliminate the tariffs while the $200bn purchase targets, which include energy, farm and manufacturing products, look daunting to achieve.

Highly sensitive issues like the US’s export ban to several Chinese companies, increased scrutiny on Chinese investments abroad
Hannah Anderson, Global Markets Strategist, JP Morgan Asset Management in Hong Kong

Nor does it address structural economic issues that led to the trade conflict. Officials say these will be dealt in Phase 2 negotiations, though the differences there are so fundamental that many investors doubt any deal will come through.

“While markets seemed to take this deal as a risk-on signal, we should all be aware that headlines about trade, particularly US China trade, are going to be a constant feature of 2020,” said Hannah Anderson, Global Markets Strategist, JP Morgan Asset Management in Hong Kong.

“Highly sensitive issues like the US’s export ban to several Chinese companies, increased scrutiny on Chinese investments abroad, and China’s application of its commitment to treat foreign and domestic business alike within China are likely to make headlines throughout the year,” she said.

On Wall Street, the S&P 500 closed at a record high of 3,289.3 points, up 0.19%, with gains fairly small after the market has rallied for months on hopes of a deal.

The index was dragged down by fall in financial shares after lacklustre earnings from Bank of America and Goldman Sachs.

“While the trade deal has provided a relief, there wasn’t any positive surprises for markets. For shares to rise further, we need more evidences of improvement in the real economy and earnings,” said Hirokazu Kabeya, chief global strategist at Daiwa Securities.

Disinflation everywhere

Bond yields dropped as a boost from the trade deal failed to offset pressure from low US producer price inflation data, which highlighted persistently low inflationary pressure.

The price index rose less than expected in December to cap 2019 with rise of 1.3%, the lowest since 2015.

The 10-year US Treasuries yield slipped to a one-week low of 1.780% compared with a high of 1.900% last Thursday and last stood at 1.793%.

Weak inflation was evident also in UK where consumer price inflation slowed to 1.3%, its slowest rate in three years.

The data fanned bets the Bank of England will cut interest rates at the end of the month, pushing the 10-year gilts yield to a 2½-month low of 0.630%.

Currency manipulators

The British pound last traded at $1.3040, having managed to recover a tad from its three-week low touched earlier this week.

The Swiss franc held firm, having rising to its strongest against the dollar in more than a year and its highest against the euro in almost three years after the US added Switzerland to its watch list of currency manipulators.

Washington’s decision led traders to think it will become difficult for the Swiss National Bank to intervene to weaken the franc in the future.

The Swiss currency last stood at 0.9643 franc per dollar, near Wednesday’s high of 0.9631.

In contrast, the Chinese yuan hovered just below its 5½-month high touched earlier this week after Washington dropped its currency manipulator label on China.

Coupled with the trade deal, warmer ties between the two countries are seen as positive for the Chinese economy and its currency.

The offshore yuan stood at 6.8851 to the dollar, near Tuesday’s high of 6.8662.

Other currencies had mostly muted reaction to the trade deal. Against the yen the dollar traded at ¥109.93, below its near eight-month peak of ¥110.22 set on Tuesday.

The euro stood at $1.1152, extending its recovery from a low of $1.10855 hit last Friday.

Oil prices edged back after touching a six-week trough the previous day on data showing big increases in US refined products.

US West Texas Intermediate (WTI) crude gained 0.48% to $58.09 per barrel. It had fallen to as low as $57.36 on Wednesday.

Reuters