US economy

’tis the party season


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Political matters dominated markets on Thursday and for good reason. Hints of progress on trade between the US and China propelled the S&P 500 into record territory, dragging global equities along for the ride, while in the UK, exit polls indicate a solid majority for the Conservative party, led by Boris Johnson. 

Starting with the UK general election, exit polls indicate that the Conservative party will gain 368 of the 650 seats in the House of Commons. That has sent the pound soaring beyond $1.35 versus the US dollar, a level not seen since May of 2018. The currency market had already been leaning that way just after 7:30pm in London and before the polls closed at 10pm, with the pound climbing over a cent from $1.3070 towards $1.3180. 

Now exit polls are not always accurate and they will be updated as votes are tallied throughout the night. But at this stage of the evening, it appears that Mr Johnson’s gamble to roll the dice and seek a larger majority to steer his Brexit deal across the line at the end of January has paid off. Business and investors have long sought clarity over Brexit and while that beckons, the hard task of the UK establishing a new trade relationship with Europe awaits. 

Dean Turner at UBS Wealth Managementsaid: 

“Now, the onus will be on the Prime Minister to make good on his highly effective campaign slogan and ‘Get Brexit Done’. Parliament is expected back next week, with his oven-ready Withdrawal Agreement soon to follow.”

As for the economy, Dean believes: 

“The biggest hope from an economic perspective will be clarity over Brexit in the near term, which should prompt a modest recovery in activity. However, Brexit isn’t yet really ‘done’, and attention will quickly turn to the future trade relationship. This phase looks set to be every bit as difficult as the last, with just over 12 months until the transition period ends on 31 December 2020.”

For the latest on the UK election, here’s the FT’s live coverage

From the prospect of some relief over Brexit to another long-running saga for markets, the trade dispute between the US and China. As expected, a tweet from Donald Trump just after Wall Street opened ignited optimism across share markets. For once, Mr Trump indicated his willingness for a deal and that was not ignored by markets. 

No matter the president’s previous form for exaggerating progress, the initial reaction in equities was emphatic with the S&P 500 rising 1.1 per cent to a new peak and extending its 2019 gain to beyond 26 per cent. Gains were subsequently trimmed, but reports of a deal agreed in principle stemmed the selling pressure and the S&P 500 closed in record territory ahead of a treaty being confirmed. The 10-year Treasury yield rose 10 basis points to 1.89 per cent, brushing aside yesterday’s dovish Federal Reserve meeting. One message is clear: a trade detente is a party favourite for market risk sentiment and that extends beyond Wall Street.

The robust New York open propelled the FTSE All-World index above its prior peak from January 2018. In that time, the S&P 500 has motored 10 per cent from its early-2018 high. As shown here, the FTSE All-World sans the S&P 500 sits well below its January 2018 high, illustrating how weakening global growth (hardly helped by a trade impasse between the world’s two biggest economies) has spread beyond the US.

Wall Street’s outperformance in global terms reflects the dominance of tech, as shown on Thursday by semiconductor stocks that extended a record climb. The Philadelphia Semiconductor index, or Sox, closed near its high for the session, up 2.4 per cent, for a gain of 56 per cent in 2019. The S&P 500 tech sector’s rise of 43 per cent comfortably exceeds the 29 per cent gains for commercial services and financials. 

A case for non-US stocks beckons. Signs of a trade detente also bolstered emerging market currencies and the Australian dollar on Thursday, while the usual havens of the Swiss franc, Japanese yen and gold retreated. Long a barometer of US and China trade negotiations, the Aussie dollar found buyers, while among the EM crowd, the leaderboard was topped by the South African rand, China’s renminbi and the Korean won. In currency terms, that’s a risk-on and if sustained will bolster appetite for EM equities. High US equity valuations versus those of EMs is a shift that has long attracted attention as the next big rotation, but that requires a catalyst in the from of a trade deal, which then triggers a weaker US dollar.

Brad Bechtel at Jefferies highlights how the Aussie dollar . . .

“ . . . has leverage to the China-US deal and it has a slowly improving domestic situation and a lot of monetary policy support. AUD/USD will be back at 0.7500 at some point in 2020 depending upon timing of a phase I deal.”

A softening US dollar has impetus after Wednesday’s US Federal Reserve meeting. Jay Powell stressed the point that it will take a significant and persistent rise in consumer prices to spur a tighter interest rate policy. The latest US producer price inflation index figures arrived below forecasts on Thursday, and a weaker tone for November retail sales, due on Friday, will not help the currency. 

The dollar index — a basket of G10 currencies — earlier on Thursday extended its decline below the 200-day moving average of 97.67 and tested the 97.20 level, previously seen in mid-July. It recovered to 97.30 late in New York as Treasury yields rose sharply on trade hopes, but in G10 terms the dollar remains below its long-term measure of momentum. As seen during 2017, when the dollar index spent a prolonged period below the 200-day moving average, global risk appetite flourishes. 

However, aiming for a repeat performance requires tangible signs of better growth across EMs and more than a “skinny” phase one trade deal. Once the details emerge from any prospective trade agreement, market sentiment will probably sell the news and wait for greener macro economic tidings. The party spirit can deliver a hangover.

Quick Hits — What’s on the markets radar

Christine Lagarde kicked off her first press conference as president of the European Central Bank by noting “some initial signs of stabilisation” and urging the assembled reporters to not “over interpret” or “second guess” her remarks. The market will take up that challenge, but for now the ECB can stick with its current policy rate and forward guidance while its strategic review is a work-in-progress during 2020. Ms Lagarde said the review would look at the ECB’s monetary policy tools and examine other approaches such as buying equities or even distributing cash direct to households via “helicopter money”.

Analysts at TD Securities noted:

“Overall we expect Lagarde and the rest of the Governing Council to remain fairly quiet on policy signals for the time being, with the stabilisation in the eurozone’s survey data suggesting that there’s no urgency for a change in policy. We still look for the ECB to deliver two further rate cuts in the first half of 2020, as we expect the data to worsen again. But for now markets will be hesitant to price in further easing without any clearer signals from the central bank.”

The FT’s Claire Jones has this review of the press conference, where four things stood out.

The new ECB president also served up a colourful “quote of the day”, adding a new avian category to the ranks of central bankers’ remarks. 

“I’m neither a hawk nor a dove; I’m an owl with a bit of wisdom.”

Your feedback

I’d love to hear from you. You can email me on michael.mackenzie@ft.com and follow me on Twitter at @michaellachlan.





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