Sterling rallies, European markets drift after Trump backs Hong Kong protestors

Morning Note

One way traffic? US equities were squeezed to fresh records again yesterday  as the main indices nudged higher on good US data and of course, the usual trade deal hopes. European stocks are drifting lower after Donald Trump signed a law that backs the Hong Kong democracy movement, casting the phase one initiative into a new spasm of doubt.

The FTSE 100 slipped under 7400 in early trade having yesterday threatened to break through the late Sep highs at 7440. Having touched that high, without any real catalyst a bit of a pullback is to be expected. Meanwhile the stronger pound is bound to be hurting the blue chips. Ex-dividend factors are scrubbing 8pts off the index also.

A batch of surprisingly healthy US economic indicators were a boost to investors and specifically US equity markets. Q3 GDP was revised up to 2.1% from 1.9% and durable goods orders far exceeded expectations. It was a sign that the US economy, as the trade war is said to bite, is maybe a lot more resilient than feared. From a market perspective it was perfect as inflation undershot – core PCE came in short of expectations at 1.6%, below the prior month’s 1.7%. Growth decent, inflation not moving up = ideal for markets as the Fed has made clear now it will only raise rates if it sees a strong and sustained uplift in underlying inflation.

Markets continue to work on the expectation of a trade deal  its close, so close – but this might be a case of labouring under a misapprehension. The message from China is there is no news on trade talks – just the tiny matter of Hong Kong…

Donald Trump has signed a law backing the Hong Kong protestors. At such a delicate moment for trade talks this could tip the balance against agreement. To rob a phrase, Trump seems apt to bring discord where there was harmony. China has promised countermeasures. It’s interesting how economic disagreements are being politicised. We’ve seen how Trump has used tariffs as a diplomatic tool – this move, albeit in reverse, is in this vein.

Now closed for Thanksgiving, markets across the pond at least should be quiet.

Over here, markets took signs of a decisive Conservative win as a cue to buy sterling.

The pound rallied firmly as a key poll signalled a whopping Tory victory in the Dec 12th election. GBPUSD had found decent bid all day and broke through 1.290 to hit 1.2950 and held the gains. The widely-watched YouGov MPR poll showed the Conservatives taking 359 seats to Labour’s 211, which would give Boris Johnson a commanding 68 seat majority. Some Labour northern heartlands would turn blue for the first tome in living memory, whilst the Tories would limit damage in Scotland to just two losses and the Lib Dem’s would fail to make the incursions they’d hoped. The Beast of Bolsover would be tamed.

It’s easy to overstate the importance of this poll but as it backs up every other poll, the picture looks quite clear now. 

However, the margins in many seats is very narrow and complacent Tory voters could stay home. The majority may be much smaller than this poll predicts, we may still get a hung parliament. Betting markets will be mis-pricing the result for sure. As politicians are wont to say, there’s only one poll that matters.

Two things to consider:

– The poll is based on national polls with Tories 11pts ahead – latest polls suggest Lab has narrowed the gap.

– predicted vote margins of under 1% in about 20 seats, under 5% in at least 30 seats.

Having pushed up through the mid-point of the range, we wait now to see if the bulls have the stomach to drive it up to 1.30 and attempt a breakout.

Whilst a clear Tory majority provides near-term certainty, the rapid timetable for agreeing a future trading relationship with EU is loaded with further downside risks for the pound.

Traders, cowed by the Brexit referendum and Donald Trump’s election, may be shy of putting all their eggs in the frying pan before the oil is hot enough. It would be prudent to consider the fine margins of this latest poll and the fact there’s still two weeks of campaigning to go. And Boris Johnson still hasn’t faced a mauling from Andrew Neil.

Elsewhere, having taken a bit of a scare as the dollar was bid on that stronger US data, and touching on a key support level at 1.0990, EURUSD has stabilised but is encountering near term resistance at 1.10080.

USDJPY seems to building momentum north of 109 but the Thanksgiving holiday may mean there’s not much impetus for further moves higher.

Oil broke a two-day win streak as US crude stocks rose 1.6m barrels last week against expectations for a 400k drawdown. Production hit a record high 12.9m bpd. Gasoline inventories swelled by 5.1m barrels vs the 1.2m increase expected.

WTI dipped through $58 but bounced easily in key support at $57.50. Thus level looks likely to offer a bulwark against more bearish data in the near term, until the OPEC meeting convenes next week (see note: OPEC Preview – the first cut may not be the deepest.)