Asia markets surged this morning after the South China Morning Post reported that Hong Kong CEO Carrie Lam would be withdrawing the contentious extradition bill. Hong Kong markets, as well as global financial markets have taken this extremely well with the Hang Seng surging by over 4% and its biggest one day gain this year.

This had been the blue touch paper that helped ignite the pro-democracy demonstrations that have blighted the Hong Kong economy for most of this year. It remains to be seen whether it will be enough to reverse the poison and mistrust between the people of Hong Kong and its executive, but it is at least a start, and this optimism has rippled over into a positive open here in Europe this morning, with strong gains across the board from financials as well as luxury stocks, with Asia-focused HSBC, Standard Chartered, Prudential and Burberry among the biggest risers.

The wider question is what this means for Ms Lam, and her future as leader of the administration. It could be that this is Beijing’s way of shifting the blame and eventually sees her replaced in the not too distant future. It’s also not clear as to whether it will be enough to placate the protestors who have become increasingly emboldened in the past few months.

Italian markets are also outperforming after 5 Star members surprisingly voted by a large majority to endorse the coalition with the Democrats, a party they have spent the last five years attacking as corrupt and incompetent.

Having taken control of the parliamentary order paper, UK MPs look set to try and pass legislation to take the option of 'no deal' off the table when they reconvene later today, after last night’s defeat for the government. It now only seems a matter of time before we get a new general election now that the Conservative party has lost its majority, having expelled the 21 MPs who voted against the government in last night's vote. 

After hitting its lowest levels against the US dollar since the flash-crash lows of 2016, the pound has rebounded strongly on the expectation that MPs will succeed in forcing the PM to ask the EU for a Brexit extension. This may well be premature if we do get a subsequent new election before the Brexit date and any new government reverses the legislation. To avoid this scenario, MPs could  refuse to grant an election until after the Brexit date, assuming they succeed in getting the EU to extend the 31 October deadline. It would be a surprise if the EU were to refuse, particularly if a new election hasn’t taken place by then, however one is also minded to remember Donald Tusk’s comments at the last extension that the UK not waste the time granted to it as a result of the last extension. We aren’t any further forward now than we were then. So much for not wasting time; nonetheless the pound has continued to push higher 

In company news, Dunelm has been one of the few retail success stories of this year, its share price up over 50% year to date. On the headline numbers the company reported a 10.7% rise in like-for-like sales, with online sales growing by 35.1%. Total revenues rose by 4.8% to £1.1bn, while underlying profit-before-tax rose by 23.4% to £125.9m, helped by improvements in gross margins of 160%. The company also announced a special dividend of 32p on top of a full-year dividend of 28p. While a decent set of numbers, management were keen to stress some caution on the outlook as a result of any Brexit disruption, but still expected to open between three and five new stores in the coming year.

Not such good news for housebuilder Barratt Developments, after its shares fell sharply as full-year revenue dropped by 2.3% from a year ago. That doesn’t appear to have affected its profits or its margins which both showed an improvement, with operating margins up by 120bps to 18.9% and operating profits up by 4.5% to £901.1m.

On the data front the divergence between manufacturing and services PMIs appears to be still showing no signs of slowing. There may well be a manufacturing recession taking place in the global economy, but services thus far continues to set itself apart from that. The latest China services data for August saw an improvement to a four-month high while in Europe the latest numbers from Spain showed activity rise to a five-month high of 54.3.

In Italy, there has been no such respite with the services sector slipping to 50.6, while in France and Germany economic activity has remained fairly solid at 53.4 and 54.8 respectively; both improvements on the numbers in July. These numbers are likely to offer encouragement to the ECB where there are clear splits opening up over the necessity of restarting the asset purchase programme that ended at the end of last year, with French ECB member Francois Villeroy de Galhau the latest governing council to weigh in with respect to a reluctance to restart this particular programme. 

The US dollar is also weaker on the back of comments from FOMC voting member, and St. Louis Fed President James Bullard that the Fed ought to consider a 50bp rate cut when they meet later this month. He was an early outrider for a 25bp rate cut earlier this year. A word of caution however is that he is likely to face opposition from other Fed officials, with Boston Fed Eric Rosengren insisting that the US economy is still in good shape, and it’s too early to draw too many conclusions.

The Bank of Canada is expected keep rates unchanged when it meets later today. The Canadian economy appears to be holding up fairly well, despite a weak payrolls report in July, which contrasted with the strength of the numbers in June. Wages growth continues to look solid, and Q2 GDP was robust, which would suggest that the central bank is more than likely to adopt a watching brief, ahead of this week’s August payrolls report which is due on 6 September.

On the earnings front we have the latest Q2 numbers from Slack Technologies after almost three months as a public company. Opening as a direct listing in June, the company’s share price performance has been a little disappointing, even though it is still trading at a premium to its listing price of $26. As yet the company remains a long way short of making a profit and investors will be looking for evidence that the solution it provides is generating the type of revenue growth to justify such a rich valuation.

US markets are expected to open higher despite yesterday’s weak finish, as the uplift from Asia and European markets helps boost sentiment.


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