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Global Markets to 16 December 2019

 

Highlights

  • Political events on both sides of the Atlantic positively impact global equity markets.
  • In the UK, the Conservative Party’s landslide victory leaves Labour in disarray.
  • A historical “phase-one” trade deal seems to have been reached between the US and China, potentially boosting global growth as we enter 2020.
  • In the FX market, sterling rallies on the back of the election result, hitting its highest level since May 2018.
  • In the energy market, US crude oil prices exceed the US$65-per-barrel level on the back of OPEC’s largest producer Saudi Arabia announcing larger-than-expected production cuts.
  • Any signs of a global economic recovery will be met with relief that a recession has been avoided, while fear that the central banks might become a little more hawkish in 2020 could encourage caution among investors.

Global Market Summary

The Conservative Party’s election win in the UK and progress in trade negotiations between the US and China positively affected the financial markets, pushing them higher over the week.

Unless another early election is triggered, Boris Johnson looks set to remain Prime Minister until at least May 2024. His party has secured its biggest majority since 1987, annihilating any hope that any of the country’s other leading parties might have had of forming a government.

The Labour Party picked up its lowest number of seats in the House since 1935, losing former strongholds in regions such as the North of England and the Midlands, as well as in Wales.

The Liberal Democrats also failed in their mission to improve their overall tally of MPs in the House, with leader Jo Swinson losing her seat and then resigning as leader of the party. It was, however, a very different story for the Scottish National Party: it won more than three-quarters of the available seats in Scotland, including LibDem leader Jo Swinson’s constituency East Dunbartonshire.

Scottish First Minister Nicola Sturgeon quickly called for a second Scottish Independence referendum on the back of this election success, asserting that the UK government could not imprison Scotland in the Union against its will.

Conservative Michael Gove was quick to point out that the 2014 Scottish Independence referendum had been billed as a “choice for a generation”, immediately dismissing any calls for a second one.

So with the general election now done and dusted and the Conservative Party’s power base secure, “getting Brexit done” will be the new government’s top priority over the coming weeks.

What happens next? The Prime Minister has already outlined the Parliamentary programme for the next few weeks: 19 December will see the recall of Parliament, followed by a Queen’s speech, and then on 23 December, Parliament will vote on Brexit. The Brexit implementation bill will then be debated in January, and the House of Lords is likely to recommend some technical amendments prior to the UK’s exit from the European Union on 31 January 2020.

This will involve ratification of the European Union withdrawal agreement, with the UK legally ceasing to be a member state on 1 February 2020. However, everything will remain much the same during the transition period up until 31 December 2020. Between now and then, the government must conclude a trade deal with the European Union, or alternatively, agree an extension to the transition period of up to two years. Should both parties fail to strike a trade deal by the deadline, WTO trading terms will then apply (unless an extension is agreed).

Given the size of the government’s majority – the Conservative Party’s largest since the Thatcher era – the tail-risk of a no-deal departure is now negligible. However, an extension to the transition period is significantly more likely.

The next UK budget is likely to be in February. This could provide for further fiscal loosening, with a heavy spending plan focused on areas such as infrastructure, which would stimulate the domestic economy.

As far as the repercussions of Johnson’s victory are concerned, the UK’s major indices immediately celebrated, revitalised by the prospect of a Conservative government until at least 2024. Previously, the markets had been hindered by Brexit uncertainty, a lame-duck government and most recently, the possibility that an extremely left-leaning government might hamper wealth creation and increase taxes, taking the country back to the dark days of the 1970s.

In the foreign exchange market, sterling rallied by more than 2% against the US dollar, reaching its highest level since May 2018, while many UK domestic shares – such as housebuilders and banks – saw double-digit gains. Meanwhile, utilities benefited following the elimination of the threat of price controls and nationalisation – which a Labour government would have brought in.

Conversely, given sterling’s rebound, many of the UK’s largest overseas earners greeted the election result with less enthusiasm. However, the benefits of a US-China phase-one trade deal are likely to mitigate against any difficulties that these businesses might experience in the future.

Since the June 2016 EU referendum, overseas investors have been abandoning the UK stock market. But the big international pension funds and sovereign wealth funds may now return as the political backdrop begins to look more stable and Brexit is finally happening.

Friday’s other very important political event was the historic phase-one trade agreement reached between the US and China. While negotiators still have plenty to do in terms of setting a timescale for the actual signing of the agreement, the markets surged on the back of the news.

This partial deal, said US Treasury Secretary Steven Mnuchin, would address a host of issues central to Washington’s trade agenda. These issues include negotiating deals governing intellectual property and technology transfer, structural agricultural issues and financial services (including the agreement of currency understandings), as well as a commitment to purchase US agricultural products and US goods.

This deal will evidently be good for global growth, and averting the next round of tit-for-tat tariffs can only be beneficial for all parties concerned. Regarding the actual signing of the trade deal, US and Chinese negotiators will continue to work towards it – it will most likely be signed at some point next month.

In the commodity markets, the price of Brent Crude oil jumped back above the US$65-per-barrel level on Friday after Saudi Arabia led the expanded OPEC group of oil producers in announcing larger-than-anticipated production cuts. It did this to underpin the market and tighten supplies. Traders are also likely to be more optimistic about demand strengthening now that a trade agreement is on the horizon – an agreement which could well lead to a recovery in the global economy.

Finally, with Brexit on its way to being concluded and the likelihood of any further trade tariffs having been dispelled by the election result in the UK… and a phase-one trade deal close to being signed by the US and China, the remaining trading days of 2019 look set to benefit from these outcomes. As we enter 2020, signs of a global economic recovery will be met with relief that a recession has been avoided, together with some concern that the central banks might become a little more hawkish in their monetary policies towards the latter end of next year.


Peter Lowman is the Chief Investment Officer at Investment Quorum, a Director of the company and an integral member of our investment committee.

This article does not constitute specific advice and investors should bear in mind that capital invested is not guaranteed. Investment Quorum is authorised and regulated by the Financial Conduct Authority.

If you would like to hear more about our wealth management services then please do not hesitate to call us on 0207 337 1390 or contact us via email. We would love to hear from you.

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