LCG: US-China deal hopes are being dashed, again.

October 16, 2019

US stock markets closed in the green on better-than-expected bank earnings on Tuesday.

But the US stock futures headed south in the overnight trading session, as tensions with China started rising again amid the US House passed a bill on Hong Kong, which requires a review of the situation in the city on annual basis to keep its special status in place. Needless to say that Beijing didn’t like the US sticking its nose into its internal affairs at all, and threatened to retaliate.

Before that, Chinese officials had said that they would buy massive amounts of US farm products, only if the US removed the tariffs on its exports. Here, we are talking about roughly $40/50 billion US dollar worth of US farm products, versus $20 billion purchased in 2017, before the trade relations between the two countries deteriorated. But that dream of Trump’s could turn out to be fiction.

As such, the optimism regarding a possible trade deal between the US and China has been shot down within a couple of days after the Washington negotiations. It looks like trouble is brewing again on the US-China trade front.

Hence, escalating US-China tensions will likely reverse Tuesday’s gains across the US stock markets, which were fueled by better-than-expected bank results in the third quarter. Financials gained 1.33% in New York, as JP Morgan and Citigroup announced higher-than-expected earnings from trading. JP Morgan also made good money helping companies issuing equity and debt, despite slowing public offerings during that quarter.

Today, Bank of America, IBM and Netflix will announce their third quarter results.

Netflix needs to go all out

Netflix had a rough quarter as its share price slumped more than 33% since July on doubts regarding its business model and the intensifying competition in the sector with a major competitor, Apple TV, stepping in with a very competitive pricing to onboard viewers.

Hence, investors need Netflix to exceed its 7-million-subscriber additions target and reveal a good-looking fourth quarter guidance. We believe that the Netflix original series, documentaries and movies remain a major attraction to viewers, but it is unsure how the company will manage to reduce its $3.5 billion free cash flow deficit in an increasingly heated competitive environment.

To be taken with a pinch of salt

The pound hit the $1.28 mark against the US dollar on the back of a short squeeze triggered by increased optimism that British and European leaders could find a Brexit agreement in the next couple of days. Even a report showing that the employment in the UK fell to a four-year low didn’t get on the way of an extended pound rally on Tuesday. Cable rallied almost 5% over the past week. Decent call options at 1.2650 and 1.28 will expire today.

Investors want to believe that a resolution on the Irish border enigma is possible. But of what good would another agreement be, if it gets dashed in London again? Hence, the optimism regarding a complete and satisfactory Brexit deal both between the UK and the EU, and within Parliament should be taken with a pinch of salt.

Pound traders could also throw a glance to the latest inflation figures today, although the economic data is secondary in determining asset prices in the presence of crispier Brexit headlines these days.

Inflation in Britain may have picked up some momentum in September. A consensus of analyst forecasts points at a 1.8% y-o-y rise in consumer prices versus 1.7% printed a month earlier. The core inflation may have advanced from 1.5% y-o-y to 1.7% over the same period.

On the equities front, the British blue-chip index suffers from a rapid pound appreciation. The FTSE was the only major European index to close in the red on Tuesday, despite a remarkable 4% rally in real estate stocks.

The FTSE futures (-0.33%) hint at a negative open in London. Fading cheerfulness on US-China trade negotiations and stronger pound could send the index below the 7200p mark at the open.

Opening calls

FTSE to open 20 points lower at 7192

DAX to open 23 points lower at 12607