Markets surge 1% ahead of China, US trade deal

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US stocks hit fresh record levels on Friday after China said first phase trade talks with the US have achieved major progress and that Beijing would cancel tariffs scheduled to take effect on Sunday, Reuters reported.

Indian stocks gained on Friday tracking a rally in global markets that were buoyed by expectations of a breakthrough in US-China trade after months of uncertainty.

US stocks hit fresh record levels on Friday after China said first phase trade talks with the US have achieved major progress and that Beijing would cancel tariffs scheduled to take effect on Sunday, Reuters reported.

Sentiments also were boosted with Boris Johnson and his Conservative Party pulling off a big win in the UK elections, which could lead the country to a swift exit from the European Union.

The BSE Sensex ended Friday’s trade at 41,009.71 points, up 1.05%, or by 428 points, while the Nifty gained 0.96% or 114.90 points to 12,086.70.

“News of the signing of the phase one trade deal between US and China has come after a series of ‘on & off’ on trade negotiations. Though Donald Trump had gone back on some of his earlier pronouncements this appears as a new positive step. This along with the emphatic victory of Boris Johnson in UK polls has come as a major relief for the slowing global economy. Johnson’s victory will pave the way for an orderly Brexit thereby removing some concerns on European trade,” said VK Vijaykumar, chief investment strategist, Geojit Financial Services.

Global markets also soared with the indices in China, Japan, Hong Kong and Korea ending 1-2.5% higher on Friday.

However, weak domestic macros remained a concern. India’s industrial output shrank while inflation swelled, official data released on Thursday showed, highlighting challenges for policymakers battling an economic slowdown amid surging food prices. Factory output contracted 3.8% in October after shrinking 4.3% in September, in sharp contrast with an 8.4% expansion in October 2018. Retail inflation continued to surge in November, fuelled by soaring food prices, as prolonged rains affected vegetable supplies.

Going forward, while food inflation is expected to remain high, the probability of a rate cut by the Reserve Bank of India (RBI) in February remains bleak, especially after the monetary policy committee unanimously voted for a rate cut pause in December, owing to inflation concerns, said analysts.

“India has entered a stagflation-type macro environment, which we expect will continue for the next few months. Given higher food and telecom prices, our provisional estimate suggests that December CPI inflation will easily breach the RBI’s upper bound target of 6% and stay elevated even in January. This should result in the RBI extending its pause into February. Given concerns around inflation, we would flag that CPI inflation (ex-vegetables) is a more measured 3.5% y-o-y,” said Nomura in a report on December 13.

According to Kotak Economic Research, among the key headwinds to growth, two primary concerns will likely continue into FY2021: limited fiscal space, and a weak financial sector. “In the absence of any significant pick up in tax revenues (especially GST—the goods and services tax), the government will unlikely be in a position to deliver any large fiscal stimulus,” it said in a note on December 11.

Meanwhile, the yield on the 10-year government bonds hit a five-month high on Friday as hopes of a rate cut by RBI dimmed after India’s retail inflation jumped the most in over three years. The 10-year bond yield gained 2bps to close at 6.79% from its previous close of 6.775%. Bond yields and prices move in opposite directions.The rupee ended at 70.82 a dollar, up 0.03% from its previous close of 70.84 a dollar.