Investors cheer trade deal while ignoring PMIs

Investors have cheered the certain delay of tariffs in the near-term with the underwhelming details of a US-China phase-one deal in principle baking peak optimism into equities. They’ve done so while completely ignoring the feeble release of European PMI data, which showed it’s still incredibly difficult to call the bottom of Europe’s manufacturing malaise despite last month’s apparent improvement. German mfg sentiment pulled back to much surprise and shows perceived weakness in the economy isn’t done yet.

The S&P 500 opened to all-time highs while European benchmarks are showing significant gains. FTSE treated itself to a historic rally conflated by post-election celebrations and easing of trade tensions. Beleaguered 737 Max manufacturer Boeing fell precipitously in trading as the company weighs up whether to slash or completely halt production of the controversial plane.

Notably, as the details surrounding the phase-one deal remain scant, USDCNH – the bellwether of US-China trade optimism – has managed to keep above the significant 7 level. While Lighthizer said there’s only routine “scrubs” to the text left to do, it has been these same routine “scrubs” which have managed to prolong the trade war for the better part of two years. A signing ceremony could take place in January in Davos but remember - this deal remains unsigned, in principle, subject to revisions, behind closed doors for the most part and fails to reduce long-term trade uncertainty.

Equities seem to be under-pricing downside risks that if China are found to be lacking or unable to meet hard US targets – a very real possibility given current Chinese demand - for agricultural purchases, then the conditional roll-back of US tariffs won’t happen.

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