This week will see Black Friday sales data and, of course, the General Election
Weekly market review and outlook: Sterling rebounds and trade deal delay
Review: 2 – 6 December
Here in the UK, the news flow is understandably dominated by the build up to the General Election next week and, with multiple polls suggesting the Conservatives have enough backing for an outright win, sterling has easily breached the $1.30 level and is heading to levels not seen since April. However, sterling’s rebound has hindered any upward moves UK stocks should have had in tandem with other developed stock markets.
The economic data at the start of the week included a host of PMI data releases from major economies and started off with some surprisingly good PMI manufacturing numbers of 51.8 from China for November, beating expectations and showing expansion. The rollback of some US tariffs along with seasonal factors were cited as explanatory factors. However, manufacturing PMI figures from Japan, the UK, the Eurozone and even the US were poor, showing a contraction and particularly weak was Germany where manufacturing activity is in recession. The respective services PMI data on the whole were better and generally expanding, albeit at slower rates, but the UK was the outlier; the country most reliant on the services sector was showing that confidence tipped into contraction among purchasing managers.
Equity markets in recent weeks have been rallying off the back of progress seemingly being made between the US and China to reach a trade deal, but a Trump comment that he has no deadline for a deal and it could come after the US general election spooked markets on Tuesday; this as well as the weak manufacturing data resulted in some strong selling pressure.
At the time of writing, we are awaiting the latest US jobs figure for November; expectations are that another 190,000 jobs were created but anything below October’s 128,000 may begin to signify that trade tensions are really beginning to hit home.
The Week Ahead: 9 – 13 December
The key economic events next week will be the interest rate decisions by both the US FOMC and the ECB; no changes are expected from either and both have suggested a period of ‘wait and see’ for the impact of their recent dovish actions. There is also the latest US retail sales data at the end of the week which should show a little bounce for November given the US holidays, Black Friday and Cyber Monday sales.
Sterling and the UK stock market will look at the General Election and its results as the key driver of direction. Markets are pricing in a Conservative majority and if so we would expect sterling to build on the recent strength, while stocks should get a boost too upon relief that business will not be disrupted by a hard left government. However, over the days and weeks the realisation will set in that the “getting Brexit done” mantra means it is just the start of another phase. A hard exit will be on the cards with another cliff edge looming in 12 months’ time and seemingly endless negotiations. Will sterling continue to rally and UK stocks recover in this scenario? I doubt it.
While a straightforward Labour majority is highly unlikely, within the current polls’ margins of error is the possibility of no outright win for any party. Under this scenario it is more likely Labour will be able to form a coalition than the Conservatives. I believe anything other than an outright Conservative win will initially be taken as a shock and we could see sterling give up most of its recent gains while a wobble of the stock market to the magnitude of several percentage points. Certain sectors will take a bigger hit such as utilities and banks. However, if investors can get over their fear of a hard left government, there may be a realisation that a softer Brexit or no Brexit at all could ultimately be better for the economy over the longer term and more than outweigh the damage from Corbyn’s anti-business stance. In a coalition situation, the hard left policies may be tempered anyway.
Ahead of the election itself we will have the latest industrial and manufacturing numbers for October with the expectation that these sector’s activity levels have fallen for a second month in a row as the October Brexit deadline did not raise inventory stocking activity as much as it did for the March deadline.
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