Is stealing IP now taboo?
If so that is quite a breakthrough
Now maybe Phase One
Can finally be done
Or is this just more déjà vu?

Tell me if you’ve heard this one before; a phase one trade deal is really close! For the umpteenth time in the past six months, this is the story driving markets this morning, although, in fairness, today’s version may have a bit more substance to it. That substance comes from an announcement by China that they are going to institute penalties on IP theft and potentially lower the threshold for considering criminal punishments for those convicted of the crime. This, of course, has been one of the key US demands in the negotiations thus far and the fact that the Chinese have conceded the argument is actually quite a big deal. Recall, if you will, that when this entire process started, the Chinese wouldn’t even admit that the practice was ongoing. Now they are considering enshrining the criminality of these actions into law. That is a huge change. Perhaps the current US stance in the negotiations is beginning to bear fruit.

Given this positive turn in the discussions, it should be no surprise that risk assets are in demand today and we are seeing equity markets rally around the world. Overnight in Asia, we saw strength across the board (Nikkei +0.8%, Hang Seng +1.5%, Shanghai +0.7%) and we are seeing solid gains in Europe as well (DAX +0.4%, CAC +0.3%, FTSE 100 +0.8%). The two outliers, Hong Kong and London have additional positive stories to boot. In Hong Kong the weekend’s local council elections resulted in the highest turnout in years and not surprisingly, given the ongoing protests for democracy, the pro-democracy candidates won 85% of the seats. HK Chief Executive Carrie Lam was quick to respond by explaining the government will listen carefully to the public on this issue. One other aspect of the elections was that they were completely peaceful, with no violence anywhere in the city this weekend, a significant difference to recent activity there, and that was also seen as a risk positive outcome.

Meanwhile, in the UK, PM Boris Johnson released his election manifesto and it was far more sensible than his predecessor’s attempt three years ago. While it included spending promises on infrastructure and increased hiring of nurses for the National Health Service, there were few other spending categories. Of course, he did remind everyone that a Tory majority will allow him to deliver Brexit by January 31 and he assured that the trade deal would be complete by the end of 2020. The latest polls show that the Tories lead 42% to 30% for Labour with the rest still split amongst minor players. Also, a Datapraxis study shows that on current form, the Tories will win 349 of the 650 seats in Parliament, a solid majority that will allow Boris to implement his policies handily. Given this news less than three weeks from the election, investors and traders are becoming increasingly bullish on the outcome and the pound has benefitted accordingly this morning, rising 0.3%. Now, it is still well below the levels seen last month, when it briefly peeked over 1.30 in the euphoria that Boris was going to get Brexit done by October 31. But, it is today’s clear winner in the G10 space.

Away from the pound, the rest of the G10 space has been quite dull, with the euro slipping a scant 0.1% after German IFO data showed that while the economy may not be getting worse, it is not yet getting much better. In keeping with the equity driven risk-on theme, the yen is softer this morning as well, -0.2%, but that is entirely risk related.

Turning to the EMG space, there has been a touch more activity but still nothing remarkable. On the positive side we see CLP rising 0.7% which has all the earmarks of a position consolidation after a very troubled couple of weeks. There has been no specific news although a background story has been focused on shifts in the local pension scheme. It seems there are five funds, labeled A through E with A the most aggressive, invested 60% in international equities, while E is the most conservative, investing 92% in local fixed income assets. It seems that in the wake of the protests, there was a substantial shift into the A fund, which has outperformed given the peso’s weakness. However, it now appears that local investment advisors are highlighting the benefits of the E fund which will result in CLP purchases and corresponding CLP strength. This is certainly consistent with the idea that risk is back in vogue so perhaps we have seen the worst in CLP. But otherwise, nothing much of interest here either.

During this holiday shortened week, we actually get a decent amount of data with most of it released Wednesday morning.

Source: Bloomberg

In addition to this, where my sense is the market will be most focused on the Personal Income and Spending data, we hear from Chairman Powell later this evening. While it is always an event when a Fed chair speaks, it seems pretty unlikely that we are going to learn anything new here. At this stage, it has been made quite clear that the Fed is on hold for the foreseeable future. If that is not the message, then you can look for market fireworks.

So the session today is shaping up to be risk focused which means that away from the yen and maybe Swiss franc, I expect the dollar to be softer rather than firmer.

Good luck
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