Week in Review: Growing Optimism for a “Phase One” Trade Deal

Growing optimism for a “phase one” trade deal helped stocks close higher this week. News over the weekend that China had announced plans to develop new measures to protect against the theft of intellectual property (IP)—a central demand of U.S. trade negotiators, was well received by the market. While short on details, the plans would reportedly involve both broadening the definition of IP theft and stiffening its penalties. Thursday’s decision by President Trump to sign a bill supporting human rights in Hong Kong did however subdue investor sentiment as it complicates bilateral trade talks. China has officially condemned the U.S. legislation and vowed to take “firm countermeasures” if the U.S. continued to interfere in Hong Kong, without giving specifics.

The week also brought some encouraging economic signals out of the U.S. New home sales fell slightly in October but topped analyst estimates, making for the best two-month gain in 12 years. Meanwhile, the second reading of annualised GDP in the third quarter was revised upward from 1.9% to 2.1%, as business investment declined less than previously estimated.

The British pound strengthened against the U.S. dollar this week as another poll suggested that Boris Johnson’s Conservative Party would be the likely winner of the upcoming December 12 UK elections. The YouGov poll predicted that the Conservative Party would win 359 seats, giving it the largest majority in decades. Prime Minister Johnson has promised that he will deliver a new Brexit deal to Parliament before Christmas.

For the week, global equities were stronger. In the U.S., the Dow Jones (+0.63%), S&P 500 (+0.99%) and Nasdaq (+1.71%) were all positive, whilst the Euro Stoxx 50 (+0.45%), FTSE 100 (+0.27%) and Nikkei 225 (+0.78%) Indices were also stronger. The Shanghai Composite (-0.46%) Index was this week’s outlier.

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Market Moves of the Week

South African business confidence improved in the fourth quarter for the first time in almost two years. A quarterly gauge measuring sentiment rose to 26 from a two-decade low of 21

The IMF has joined a chorus of voices putting pressure on President Cyril Ramaphosa’s government to accelerate moves to boost economic growth and rein in debt. It warned that South Africa faces weak economic growth, inequality and a greater credit-rating risk, should the government not implement necessary reforms. Non-residents have sold a net $9.8 billion of South African stocks and bonds in 2019, already the most in a year since Bloomberg started compiling the data in 1998.

SA’s plan for expropriation of land is facing a major legal problem. The Department of Trade and Industry (DTI) warned Parliament this week that South Africa’s existing international investment treaties may prevent it from expropriating land from foreigners. South Africa currently has 49 bilateral international treaties which contain legal undertakings on the expropriation and compensation of the property of any investor. Such an affected investor would be in a position to invoke a legal challenge against the South African government if the investor is not satisfied with the compensation offered.

The JSE All Share Index ended the week down 2.49%, with industrials (-3.22%), financials (-4.35%) and resources (-0.68%) all weaker.

Weekly Market Moves - 30 Nov 2019
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Chart of the Week

Over the past 18 months, financial markets have witnessed the swings between optimism and pessimism for a U.S.-China trade deal, providing reasons, or at least excuses, to buy or sell stocks. Does it really matter though? Since Donald Trump was elected, the 100 companies in the MSCI World index with the greatest exposure to China have performed in alignment with the index as a whole. At present, they are ahead by 2% since the election. Further, it is hard to match trends in the relative performance of those China-exposed companies to developments in the trade conflict. Looking at the broader outlines of asset allocation, it is also surprisingly hard to map the excitement of the trade conflict to moves between stocks and bonds, suggesting that it matters less than investors tend to think.

Chart of the week - 30 Nov 2019

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