INSIGHTS

Duncan Donald

Mon, Dec 23


Brexit deal negotiation escalates as the UK PM’s euphoric surge slips back

In the UK last week, we saw a sharp reversal of the elevated position seen in the Pound following Boris Johnson’s landslide victory in the General Election.  As the polls hit the news on the night of the election the pound soared from 1.3150 to 1.3500 against the US Dollar as the algorithms hurried to buy such a strong majority. The heights of the move were not immediately corrected as we often have seen but maintained as the knee jerk reaction seemed to be that with this majority Johnson will be able to progress his Brexit Pathway.

 

But, just over a week on with the price action completely reversed and the Pound back at the 1.3000 level, its evident questions are again being raised of Johnson’s Brexit deal.  His actions show he’s racing to force his deal through the house as soon as possible, and in one speech last week he seemed to point towards the fact that the worst case of a divorce from the EU with no-deal remained a possibility. The market moves have shown what most already knew, the euphoria of now functional government is a positive, but the task at hand remains vast.

 

The Bank of England last week confirmed the successor to Mark Carney in the role of Governor. They have opted for Andrew Bailey, who is the current head of the Financial Conduct Authority. The switch will take place in March 2020 when Carney’s tenure comes to an end. The appointment didn’t come without criticism, following his slightly blotted tenure with the FCA. 

 

Last week saw a continuation of the global stock market surge and as is typical we saw fresh highs in the S&P on a Friday, as the markets brush away fears of a December sell-off similar to the plunge seen in 2018.  Buoyed by positive sentiment in the trade negotiations. There does remain a nagging doubt as to the phase one trade deal much lauded by Donald Trump does remain unsigned. But we are seeing signs of import and export Tariffs being positively adjusted by both sides. This leaves the US stock markets on track to have one of the strongest years on record, aided by lower interest rates positive trade deal and a surging employment market.

 

This week with the holiday season upon us market liquidity will be low which often brings high volatility. With the UK, US and Europe off on Wednesday and Thursday, the expectation would be for quieter markets, but as is often seen any move can be exaggerated due to low liquidity.  Monday will see Boris Johnson back in parliament pushing to achieve the Brexit deadline of 31st January.  Thursday brings US Jobless claims data. With many market participants back in on Friday, we see Japanese Retail Sales and Industrial Production.

 

As we come to the end of the year, we often see a great deal of profit-taking and portfolio rebalancing which can affect both stock and currency markets. These are by no means a given to occur but are often seen around certain “Fix” periods (1 pm and 3 pm UK time are when the height of the volatility is often seen). These moves often result in extreme price action as a currency is either bought or sold at that moment. These are typically seen at month ends and quarter/half year ends. But, the end of the year does often bring some of the bigger moves, especially with many participants enjoying an extended break and low liquidity. We can start to look out for them on Friday which coincides with settlement year-end then, of course, the 31st.

 

Have a wonderful Christmas!

 

 

The Week Ahead: 

Monday - With a very quiet start in the European session we receive Canadian GDP at 1.30 as well as Durable Goods and Core Durable Goods at 1.30. 

Tuesday - Early in the morning we get Japanese CPI data

Thursday - Japanese Unemployment rate, Retail Sales and Industrial Production 

Friday - UK high street lending data at 9.30. Crude oil inventories at 4 pm


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