A perceived diminution of risk between the US and China, on the back of a suspension of tariffs this weekend, and the announcement of a phase-one trade deal, has given markets a major lift over the last 24 hours.
We’ve also seen a landslide victory for the Conservatives in the UK general election, which has led to European markets surging today, with the FTSE 250 hitting record highs, in an early Christmas present for investors across the world, but particularly here in the UK, where there were significant concerns about a nightmare before Christmas if Labour had managed to deny the Conservatives a parliamentary majority.
The fact that they couldn’t has seen the German DAX and the CAC 40 achieve their best levels since January 2018, as investors celebrate the prospect of an end to the current Brexit deadlock, and look towards the next stage of talks, which will focus on the political declaration and the prospects for trade.
While these talks are expected to be more complicated than the withdrawal agreement, the fact that Boris Johnson has such a big mandate means that he has the luxury of being less exposed to any minority pressure groups within his own party, as well outside of it. This means he can probably afford to be more pragmatic about what to do, something that Theresa May found impossible when she lost her majority in 2017. He is also coming at from the direction of the UK already being aligned from a regulatory point of view, meaning that any agreement is likely to be about the amount of divergence.
The complete defenestration of the Labour Party in yesterday’s vote has also unlocked a significant inflow into the FTSE250 and the broader London market with the biggest gainers coming from those stocks that were in the Labour Party’s sights as possible nationalisation targets.
Transport stocks like Stagecoach Group, National Express and Go Ahead Group all key players in the UK rail network have seen big gains, as have utility and power companies Centrica, SSE, Severn Trent and National Grid. Royal Mail and BT Group have also seen decent buying interest from investors relieved that the prospect of nationalisation has disappeared from the political discussion.
UK house builders Taylor Wimpey, Persimmon and Barratt Developments are also reaping the tailwind of the removal of political uncertainty with gains in excess of 10%, while the banking sector has also had a good day, with RBS, Lloyds and Barclays all higher ahead of next week’s Bank of England annual stress tests.
Also worth keeping an eye on are infrastructure stocks like Balfour Beatty and Kier Group which have also shown some decent gains in anticipation of future government spending on rail and other projects.
US markets opened slightly lower despite the strong gains seen here in Europe, as caution started to grow over the prospects for a US, China phase one deal, ahead of a press conference from Chinese officials which finally outlined what had been agreed.
Chinese officials confirmed that a deal had been agreed, and that the December 15th tariffs have been suspended, while outlining a framework which included a phased tariff roll back, with a signing ceremony to be agreed at a later date. Soon afterwards President Trump confirmed the details while also saying that negotiations on phase 2 would start immediately, pulling stocks off their lows and back into positive territory.
In company news the latest numbers from Oracle which beat expectations on quarterly profits by a couple of cents a share.
American Airlines and Boeing are also in focus after American removed Boeing 737 MAX jets from its schedules until May 6th. Investors still appear to be underestimating how long it is likely to take before the 737MAX is able to get back in the air, and even if it is able to fly again at all.
US retail sales for November came in slightly below expectations, rising 0.2%, and down from a revised 0.4% in October.
The pound has been on a tear today in the wake of last night’s historic election win by the incumbent Conservative government. While investors had been pricing in a small conservative majority not many had been expecting the landslide we subsequently got. It would appear that outside of the London bubble there was a widespread underestimation of how toxic Jeremy Corbyn was, and herein lies the rub. This election may have been about Brexit, but it was also about Jeremy Corbyn and he was poisonous to Labour’s prospects in areas where they should have been strongest.
Year to date the pound has also been the best performer against the US dollar as markets price in the orderly passing of the withdrawal agreement early next year.
Gold hasn’t really moved despite the big up move in equity markets which would appear to suggest that while investors have become more optimistic, there is a caucus that doesn’t want to completely move out of the traditional safe haven assets.
Crude oil prices are well supported, helped by what looks like two fairly big tail risks to the global outlook, being pushed onto the back burner. The prospect of an orderly Brexit, and a US, China trade deal has helped push US crude prices to their highest levels in three months.
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