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UK-EU trade talks head into the final strait as US markets hit new record highs

CMC Markets

European markets were set fair for another decent day across the board today, with the DAX once again pushing up to its best levels since February, however the FTSE 100 has slipped back a touch.

The FTSE has been unable to gain a foothold above the 6,600 level, subsequently slipping into negative territory on comments from Michael Gove, who poured cold water on some of the optimism over the prospect of a Brexit deal by this weekend, saying that it was more likely that we may not get a deal. The slightly firmer pound may also be acting as a drag on the margins, though it is also off its highs on Gove’s comments.

These comments don’t appear to have had the same effect on the FTSE 250, which has pushed up to its best levels since February, as markets start to get a little bit of headline fatigue, when it comes to the various utterances of UK and EU politicians, as well as officials.  

The divergence between the comments from EU negotiator Michel Barnier, which have been fairly optimistic, and the recent comments from Michael Gove, are a little hard to square with what markets are starting to price in. As a rule, markets generally tend to price in an optimal outcome, which means despite some of the scepticism we do appear to be on the right track, with the European Parliament setting a deadline for this Sunday for a ratification.   

In terms of the winners and losers today, it has been a bit of a mixed bag, with WPP the best performer as the shares hit a six-month high after outlining its medium-term targets for margins and EPS growth over the next three years. The company is targeting 15.5% to 16% headline operating margin by 2023, with double-digit EPS growth over the next three years.

On the downside, Vodafone shares are acting as a drag, though it's not immediately obvious why, while the likes of supermarkets, as well as hospitality are also on the slide after a whole host of new parts of England were placed into tier 3 restrictions from Saturday.

Watches of Switzerland's share price has hit record highs today after the company revised its full-year sales and profit forecasts upwards. In its H1 numbers, revenue declined 2.6% to £414.3m, with a strong rebound in revenue of 21.5% in Q2 helping to mostly offset the hit in Q1. The improvement in guidance appears to be stemming from a strong start to Q3, despite the impact of national lockdowns which has hit shopping centre footfall, with e-commerce sales rising 102.4%. UK sales have risen 7.7%, while sales in the US are up 22.7%. Revenue guidance at the lower end has been raised from £880m to £900m, while the company has been the latest to announce it intends to repay furlough support subject to no further disruptions for the remainder of the year.

The Serco share price has also seen a nice bump higher, after announcing it had won the rebid contract for the Acacia prison in Western Australia, which is worth up to £790m.

US markets opened higher, setting new record highs on the S&P 500 and Nasdaq, despite another shocker on the weekly jobless claims, which saw them come in at 885,000, well above expectations of 815,000, and an increase of an adjusted 862,000 on the previous week. It would appear that the claims numbers are starting to accelerate higher in a further sign that the US labour market is starting to deteriorate, as we look towards 2021.

These sharp increases call into question the type of non-farm payrolls report we might see for December when they are released on 8 January, with some predicting we could get a negative number. In a strange kind of way these sorts of claims numbers are likely to incentivise US lawmakers even further, after this week’s weak retail sales, into passing an economic aid package by the end of the week. On the plus side, housing starts and building permits for November came in much better than expected.    

Alphabet and Facebook shares are in focus after Google was accused of colluding with Facebook in the online ad market, as the US opened a new antitrust investigation into both companies, as US lawmakers opened up another front against the big tech giants. On a more positive note for Google, the EU approved its $2.1bn acquisition of Fitbit subject to certain conditions, including the enforced technical separation of Fitbit’s data from Google’s. FedEx is due to report its latest Q2 numbers after the bell

The pound and the euro have continued to crack on today, making new two-and-a-half year highs against the US dollar after last night's Federal Reserve decision, with the US dollar index falling below 90 for the first time since April 2018. The pound has also been buoyed by reports that the Brexit talks have entered “the tunnel”, which suggests a deal might be entering the final stages, and perhaps even agreed over the weekend.

The Bank of England, not unexpectedly, kept monetary policy unchanged at its latest meeting. With so little visibility on what type of deal is struck between the UK and EU, there was little else they could do, especially given that they increased asset purchases by another £150bn in November. The pound did slip back from its intraday peaks on comments from Michael Gove that a Brexit deal might not be as likely as the headlines would suggest, putting the prospect of a deal at less than 50%, however the weakness proved to be fairly short-lived.

The Swiss National Bank left rates unchanged at -0.75%, while at the same time saying it remained ready to intervene in the FX markets, as and when necessary.

Bitcoin has continued to push higher after cracking through its previous record highs earlier this week, with the $20,000 level now in the rear-view mirror and all manner of targets now being touted with the $30,000 level the next key level. While a lot of scepticism still surrounds cryptocurrencies, some in the investment community appear to have warmed to them, with a number of funds being launched this year in order to take advantage of the move towards digital currencies, as part of a broader portfolio mix. This appears to be what is helping to drive the current move higher.

Crude oil prices are also higher, hitting a nine-month high, with Brent over $51 a barrel, as a weaker US dollar and the prospect of a new US stimulus deal, along with a bigger than expected US inventory draw, helps to boost prices. While this is well off the lows of the year, to the tune of 170%, it is important to remember that Brent prices are still 25% lower on the year.

Gold prices are also catching a bid, closing in on the $1,900 an ounce, as the US dollar gets hammered across the board.


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