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Neil is chief market analyst for Markets.com and also writes for the Investors Chronicle as ‘The Trader’, with the daily market outlook published online each morning.
UK assets surge on huge election win for Boris Johnson
Sterling jumped sharply,
enjoying its best gain in a decade as the Conservatives romped home to a
convincing victory, while the FTSE also rose as investors enjoy the Boris
Bounce. Broadly equity markets were well bid as hopes of a US-China trade
deal crystallise into something more concrete.
Huge win for Conservatives in
UK general election
The Conservative Party has secured an historic mandate with a thumping victory, providing clarity for investors where there was confusion. For the markets and for business this is the perfect result – a clear majority for the Tories, the Corbyn risk nullified entirely, a major reduction in uncertainty around Brexit and even a quick Budget to inject the economy with some added impetus. The only doubts are around the next phase of Brexit – the future relationship – but with a large majority the government will be in a better place to negotiate and do what it needs to do.
Sterling was heavily bid on the
news. The going was looking a tad heavy but the ground firmed once we had the
exit poll. GBPUSD surged to as high as 1.35 but pared gains a
touch to trade around 1.3470 heading into the morning session. Near-term a look
to 1.36 and thence to 1.37 seems feasible.
UK stocks surge on Tory
The FTSE 100 rose over 100 points to trend above 7,388, moving higher despite a clear drag from the stronger pound, which will cap gains. The City has awoken and the relief rally on a massive Tory win has begun. I think 8,000 looks overly bullish as a target, but something like 7700 before the year is out is doable. Near-term, 7440 offers a big test.
Now calls for a rebound in confidence in UK plc. Fundamentally
undervalued UK equities – forward PE multiples have been very cheap versus
European and US peers of late – will now look especially appealing as they have
largely missed out on the rally seen elsewhere. The FTSE 250 put in more
considerable gains – up 1,000 points to easily take out 21k and hit an all-time
high. Sterling and UK equities are in for a Boris Bounce.
Remember just how cheap UK
equities had become – trading on 12-month PE multiples of about 13 vs about 15
in Europe and 18 on the S&P 500. The FTSE 250 nearly made it to 22k but
topped out an all-time high at 21,910. The FTSE 100 added about 100 points.
equities were basking in the warm glow of the Tory victory as investors threw
out their worst-case scenarios for the British economy. There are some
seriously relieved investors – and bankers and corporate financiers.
particular, we are seeing some absolutely stonking moves among the
UK-focused equities. Anything largely exposed to the UK economy took off
at the open, while the drag on dollar earners from the stronger pound was not
so large as to worry the market. It all points to a huge vote of confidence in
the prospects for the British economy as a result of the Tory win. You just cannot
understate the sense of relief here in the City.
had been suffering from a significant Corbyn discount and exploded as the
threat of nationalisation evaporated with the Labour vote – United Utilities,
Severn Trent and National Grid all jumped around 8%, while Centrica jumped 9%.
were also undervalued and caught a bid on hopes that construction will benefit
from the Conservative victory. We should also consider the potential risk that
a Labour government could have posed to their profits being
removed. Barratt Developments and Taylor Wimpey both rose more than
10%, while Persimmon was among the top movers at +14%.
were also bid – with the most heavily exposed banking stocks to the UK economy
enjoying the biggest gains. RBS and Lloyds both rose 11%, with Barclays up
nearly 8%. Investors
are also needing to dial back their expectations for a Bank of England rate cut
so this is an important boost for the banking sector in the UK, with Lloyds in
particular the most exposed to the mortgage market.
retailers found new support with Dixons Carphone shooting 16% higher, with
Marks & Spencer and Sports Direct +6%.
retail, banking, utilities – the whole lot is seeing a huge rotation.
Asian stocks higher on trade sentiment
Asian markets have rallied strongly overnight, taking their cue from the
records on Wall Street as it seems a phase one trade deal is as good as
done. Although not quite signed, sealed and delivered, it seems like
the US and China have come to terms.
White House will cancel the planned tariffs on $156bn in
Chinese goods scheduled to take effect on Sunday, whilst also cutting by half
the existing tariffs on around $360bn of Chinese goods.
it mean we get a comprehensive deal in 2020? Hard to say, but it this has
created the necessary Christmas cheer for a decent Santa Rally. It does rather
look like some of the worst risks and headwinds are fading away – a phase one
deal complete, greater political certainty for the UK and even a slightly
doubts creeping in about
whether China has accepted this deal – of course if it were to be scuppered now
there would be a sizeable downside for equity markets given the ramp we have
surged 2.5% to its best level in over a year above 24k. Hong Kong rallied 2%
and mainland China is up over 1%.
US equity markets had surged to new all-time highs after Trump first tweeted
the deal was oven ready.
indices are pointing broadly higher.
dollar was offered with DXY down to a 96 handle and its weakest since July.
EURUSD has rallied through 1.1170 and held the gains.
Risk-on moves hammer bonds, gold dragged lower
Bonds were crushed by the
risk-on sentiment from the trade deal – US 10s taking 1.95% at one point.
Higher yields knocked gold but prices haven’t capitulated
entirely. Having traded at a high of $1486, gold has retreated to $1467 having
hit a low of $1462. The fact prices haven’t retested the earlier Dec lows
suggests there is still bid there. Crude oil held gains with WTI above $59.50.
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