What you need to know before markets open: Bears waiting to pounce

• Brexit and Sino/US trade wars have been the focus.
• The details and various risks to the success of a  Sino/US trade deal lasing weigh on risk appetite.
• UK leadership could be coming across too ambitious for UK/EU trade deal by Dec 2020.  

Ahead of markets opening today, there have been some positive developments  in the Brexit and Sino/US trade sagas, yet an underbelly of  pessimism in markets is keeping a lid on market rallies  with bears waiting to pounce on dissipating risk appetite.  

Sino/US trade wars: Phase-one agreement to be signed in January

Both and Chinese officials announced on Friday that a deal they finally agreed to the phase one agreement after a contentious 18-month trade war:

• President Donald Trump vowed not to pursue a new round of tariffs set for Sunday.
• China agreed to billions of dollars in agricultural purchases from the US.
• The US and China had agreed on phase-one of a trade deal last week, although markets are of the mind it is a one-and-deal scenario – (not so bullish).
• Markets are in anticipation of the details of the phase one-deal between the US and China.
• The world’s two largest economies plan to sign the partial accord in the first week of January.
• China have only stated that they will proceed for legal review and translation without touching on a timeline.
• Details of the new trade deal only appear to be a slight improvement on the details that the earlier ‘phase one’ deal had already agreed.  
• Key difference is that this deal is “fully-enforceable”.
• The US has agreed to halve the tariffs on US$120bn of Chinese goods (from 15% to 7.5%) but will retain a 25% on US$250bn of Chinese imports.
• China  confirmed prior agreement to purchase an additional US$16bn in goods from the US over the next two years.
•  Wall Street was unable to hold on to gains on murky details to the trade deal and the fact that  it  does not completely reduce the chances of trade disputes between the two nations in the year ahead.

The latest Sino/US headlines

• Details are still murky (neutral/bearish for markets and FX-risk crosses  such as AUD/JPY).

US Trade Representative Robert Lighthizer said on Sunday that the phase one U.S.-China trade deal reached on Friday is “totally done,” and it will nearly double US  exports to China over the next two years.

“There’s a translation period. There are some scrubs,  this is totally done. Absolutely.

 lead negotiator, Robert Lighthizer,    said on CBS’ “Face the Nation.”

“We have a list that will go manufacturing, agriculture, services, energy and the like. There’ll be a total for each one of those,” he said. “Overall, it’s a minimum of 200 billion dollars. Keep in mind, by the second year, we will just about double exports of goods to China, if this agreement is in place. Double exports.”

“But ultimately, whether this whole agreement works is going to be determined by who’s making the decisions in China, not in the United States,” Lighthizer said. “If the hardliners are making the decisions, we’re going to get one outcome. If the reformers are making the decisions, which is what we hope, then we’re going to get another outcome.”

Brexit: Tories thrash labour, puts soft Brexit firmly on the map

The UK election gave PM Boris Johnson’s  Conservative Party an 80 seat  majority in the House of Commons. This was  the Tory’s  largest win in over 30 years. Labour succumbed to its worst election result since 1930. The focus now turns to Brexit and the 31 January deadline, with the election results giving Prime Minister Johnson a clear mandate to pave the way out of Europe.

The latest Brexit  headlines

• Speaking to Sky’s Sophy Ridge on Sunday,  Michael Gove promises Brexit trade deal with EU by end of 2020.
• Speaking to Sky’s Sophy Ridge on Sunday, Michael Gove  said transitional arrangements will definitely stop on 31 December next year.
• Speaking to Sky’s Sophy Ridge on Sunday, Michael Gove said: ‘I’m confident that we will be able not just to leave the EU on 31 January but also to conclude all the details of a new relationship in short order.’  
• “And as a number of people have pointed out, there are areas where the European Union’s interests and the United Kingdom’s interests are already closely aligned, so I’m confident that we will be able not just to leave the EU on 31 January but also to conclude all the details of a new relationship in short order,” –  Michael Gove said.  
• There are deep reservations in Brussels about whether a trade deal with the EU by 2021 was possible.  
• EU leaders are considering a move to take the initiative and request an extension to the transition period, keeping the UK under Brussels regulations beyond 2020.
• Boris Johnson remains insistent  that he  will not seek an extension  beyond 11 months – risk to GBP do to  the prospect of an exit on World Trade Organization terms if no trade deal can be struck by then Dec 2020.  

Additional notes for the open

CFTC Commitments of Traders report:

• GBP short 23K vs 30K short last week. Shorts trimmed by only 7K leading into UK elections – Next week’s to capture 2.5% spot rally in cable.  
• JPY short 44K vs 48K short last week. Shorts trimmed by 4k.
• EUR short  68K vs 69K short last week. Shorts trimmed by 1K.
• CHF short 21K vs 22K short  last week. Shorts trimmed by 1K.
• AUD short 37k vs 36K short  last week. Shorts increased by 1K.
• NZD short 25K vs 27K short last week. Shorts trimmed by 2K.
• CAD long 21k vs 21K long last week.   No change.

Key notes:

• Chart of the week: GBP/USD bulls target a grind higher to 1.3850s

• UK PMI Preview: GBP/USD bulls to target 1.35 handle on improved data

• Forex Today: The world gyrates around the US-China trade deal