Trade deal to boost China stocks
By Peter Rosenstreich
Hurdles remain, but it looks like a Sino-American trade deal is on the way. China is offering reduction of restrictions, including tariffs on food, chemical and autos while the USA is reconsidering its sanctions on Chinese products in place since last year. A formal agreement could be reached at the summit between President Trump and Chinese President Xi Jinping around 27 March. Chinese equities look attractive, despite growth weakness, given the recovery in credit, fiscal and monetary areas.
China’s yuan is up nearly 2.9% year to date. As a deal materializes, trading for the CNY will revert to growth, loose monetary policy (a reserve rate cut of 1.5% expected) and a current account surplus contraction. China’s Caixin manufacturing new orders index climbed in February to 50.2, the largest monthly gain since August 2013 and a sharp bounce from 47.7 lows in January. A US-China Trade deal will give markets a much need psychological boost which would spill into real activity in our view.
Short the pound
By Peter Rosenstreich
The pound has staged a decent rally against the USD and EUR in the past weeks, and 1-month implied volatility has fallen further. But uncertainty on Brexit is extreme. Extension of Article 50, thus reducing the likelihood for UK crashing out of EU, is questionable. We will sit on the sidelines (or go long on dips). Today’s UK construction PMI is likely to fall towards 50.2 from 50.6 in January: evidence that Brexit uncertainty is taking a toll on the real economy.