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UK politics and US-China trade to remain in focus

CMC Markets

European and US stocks rallied yesterday on the back of the Brexit delay in addition to the positive sounds from the US-China story.

It was announced the EU supported the UK’s request for an extension for up to three months. The UK’s exit from the EU has been pushed backed until the end of January 2020, but the UK might leave before then should approval for a deal be reached.

Last night Boris Johnson failed to get enough votes to secure a general election on the 12 December. Under the fixed-term parliament act the Prime Minister needed the support of 434 MPs, but only 299 voted with Mr Johnson, while 70 voted against. It wasn’t a shock that Boris lost the vote, but there still might be general election before Christmas. It is believed the Liberal Democrats plus the Scottish National Party are looking to introduce a bill that would only require a majority of MPs to call a general election. It is understood the smaller opposition parties are seeking to hold an election on 9 December, and the political process could kick off today.                           

The US-China trade situation seems to gathering positive momentum. At the back end of last week we heard that ‘headway’ was being made, and the impression was that phase one of the trade talks was nearly complete Yesterday, Donald Trump said he hoped a trade pact would be agreed next month. China’s Xi Jinping plus President Trump are due to attend the Asia-Pacific Economic Cooperation meeting in Chile next month. Phase one of the trade deal is tipped to be signed then. The US Trade Representative is considering extending the tariff suspension on $34 billion worth of Chinese imports. The suspension of levies are due to expire in late December.  

The optimism surrounding the US-China trade story helped equity markets in Europe, but the real benefit was seen in markets, where the S&P 500 plus the NASDAQ 100 registered fresh record highs. It is worth remembering the US-China trade deal was nearly wrapped up in May, but the talks turned sour, so nothing is a done deal until it is signed. Equity markets in Asia are mixed as the US-China trade situation is in focus.  

Later this week, the Federal Reserve will announce their interest rate decision. According to FedWatch, the markets are pricing in a 90% chance of an interest rate cut of 0.25%. The view the central bank will cut rates is no doubt lifting equity markets too.

Yesterday was a quiet day in terms of economic releases. The CBI realised sales report came in at -10 for October, which highlights the fragile state of the British retail sector. It is worth noting the August reading was -49 – the weakest reading since late 2008.

Gold lost ground yesterday as dealers poured their funds into risker assets like stocks. The risk-on strategy by traders was evident as some of the major US equity benchmarks printed fresh record-highs, which coincided with a move back below $1,500 in gold. The metal typically benefits from the softer US dollar, but yesterday the positive sentiment in stocks too precedence.

Oil started off strong yesterday but finished lower. The energy was initially lifted by the US-China trade optimism – the same sentiment which boosted equities, but the poor Chinese data from the weekend kept playing on traders’ minds. Beijing confirmed that profits from industrial companies in China fell at their steepest pace in four years. State-owned businesses saw profits fall by nearly 10% on an annual basis, while private sector companies saw earnings rise by over 5%. Traders couldn’t escape the fact that China is a major importer of energy, so profits are falling, demand is likely to dip.  

The UK Nationwide house price index (October) will be released at 7am (UK time). Economists are expecting 0.0%, which would be an improvement from the -0.2% reading in September.

At 9.30am (UK time) the UK will release the mortgage approvals and mortgage lending reports, and traders are expecting 65,000 and £3.8 billion respectively.

The US CaseSchiller house price index report will be announced at 2pm (UK time). Economists are expecting 2.1% on a yearly basis, which would be an increase on the July report of 2%.

EUR/USD – has been driving higher since the start of the month, and a break above 1.1200 might put 1.1249 on the radar. A move lower might bring the 50-day moving average at 1.1035 into play.    

GBP/USD – remains in the recent aggressive upward trend and a sizeable break above the 1.3000 area might bring 1.3178 into play. A move lower might put the 200-day moving average at 1.2714 on the radar.           

EUR/GBP – is still in the bearish trend, and a break below 0.8575 could pave the way for 0.8471 to be targeted. If it manages to hold above the 0.8600 mark, it might retest 0.8786. 

USD/JPY – while it holds above the 50-day moving average at 107.46 it could target 109.31. A move back below the 50-day moving average might bring 106.48 into play.