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Trade deal is done but not tariffs for now, sees “risk premia” trickle in! (Wednesday, January 15, 2020)

Stocks were steady in early Asian trade on Wednesday as investors awaited the signing of an initial U.S.-China trade deal, with sentiment somewhat dented by comments from the U.S. Treasury Secretary that tariffs would remain in place for now. MSCI's broadest index of Asia-Pacific shares outside Japan eased 0.13%, Japan's benchmark Nikkei and South Korea's Kospi shed 0.29% and 0.48%, respectively, while Australian stocks added 0.33%.

Treasury Secretary Steven Mnuchin said late Tuesday that the United States would keep in place tariffs on Chinese goods until the completion of a second phase of a U.S.-China trade agreement.

China's yuan weakened on Tuesday and the Japanese yen reversed earlier losses after a report that the United States will keep tariffs on Chinese goods through the US election hurt risk sentiment. The news came a day before the signing of a preliminary U.S.-China trade agreement to ease an 18-month-old trade war.

Bloomberg News reported that the United States will review and remove existing tariffs no sooner than 10 months after the deal is signed.

The U.S. Treasury Department on Monday reversed its designation of China as a currency manipulator in what has been seen as a conciliatory gesture ahead of the deal signing. Risk sentiment has improved and demand for safe-haven assets like the yen have decreased on signs that the two countries are closer to de-escalating the trade war that has been blamed as a major headwind to global growth.

The trade deal "doesn't address the structural issues, but at least for markets it reduces some of the stress and some of the anxiety and uncertainty that plagued the markets throughout 2019. The yen gained to 109.92 after rising to 110.2, the most yen per dollar since May 23.The offshore Yuan weakened to 6.89, after rising to 6.87 per dollar, the strongest since July 11.

The Swiss franc also hit session highs of 0.966 on safety buying, a day after the United States added Switzerland to its watchlist of currency manipulators. The greenback rose against the euro as year-end rebalancing that had benefited the single currency at the expense of the dollar continued to be unwound.

Data on Tuesday showed that U.S. consumer prices rose slightly in December and monthly underlying inflation pressures retreated, which could allow the Federal Reserve to keep interest rates unchanged at least through this year. The next major U.S. economic focus will be retail sales on Thursday.

U.S. Treasury yields ticked down as investors took stock of weaker-than-expected consumer prices and the expected signing of the interim trade deal, with benchmark 10-year note yield falling to 1.807%. Markets were also absorbing news the U.S. government is nearing publication of a rule that would vastly expand its powers to block shipments of foreign-made goods to China's Huawei, as it seeks to squeeze the blacklisted telecoms company.