Market recap: US-China trade positivity pushes major US indices to third weekly gain
Equities rose on Friday, after the US announced it is close to finalising the first phase of a trade deal with China. The DJIA gained 0.57% and the S&P 500 advanced 0.41%. Tech stocks were once again the highlight of the day, as Intel’s price surged 8.10% after it beat earnings estimates and raised its full-year outlook. But Amazon held the Nasdaq back due to its stock falling 1.09%, after it lost a US$10bn cloud contract with the Pentagon to rivals Microsoft. The Nasdaq gained 0.70%.
US major indices continued to gain on a weekly basis, as upbeat earnings and positive progress on the US-China trade war lifted investor optimism. The DJIA rose 0.70%, the S&P 500 surged 1.22% and the Nasdaq spiked 1.90% from the previous week.
Safe haven assets remained mostly flat, with EU officials deciding to delay their decision on the Brexit extension until after UK’s House on Commons vote on whether to hold a snap general election. British Prime Minister Boris Johnson called for an election to take place on December 12th last Thursday and is set to put the motion to a vote in the Commons on Monday. Gold gained 0.04% and the yen weakened 0.06% against the greenback. US Treasury yields rose, with two-year yields gaining 4bps to 1.62%.
Meanwhile in Asia, the Nikkei and Straits Times Index tracked US equities, ending the week 1.37% and 2.29% higher respectively. The Hang Seng Index lost 0.20% from the previous week. The Nikkei and Hang Seng Index started Monday’s trading session in the green, opening 0.24% and 0.39% higher respectively.
This week’s focus will be on central banks, with decisions on monetary policy coming from the Bank of Japan, Bank of Canada and the US Federal Reserve. Also, investors will monitor the Commons’ vote on Johnson’s call for a general election. Finally, important economic data coming out this week includes inflation rates (from Germany, the Eurozone and the US), GDP data (from the Eurozone and the US), and US labour market data.
Earnings season also continues this week, with Alphabet, AT&T, Beyond Meat and Spotify set to release data.
Today’s analysis: EU officials look likely to decide on Brexit extension in Brussels today
EU officials are set to meet in Brussels again today to decide on granting yet another extension to the Brexit deadline. After EU officials deferred their decision on Friday, (due to France’s resistance to a three-month extension), French officials have suggested that a decision today is likely after a telephone call between French President Emmanuel Macron and Johnson on Sunday afternoon. French officials suggest that Macron has been persuaded by Johnson that a UK general election is close. The EU’s draft agreement for the extension also rules out any further negotiations on the withdrawal agreement.
Johnson needs to obtain a two-thirds majority in the House of Commons to approve his proposal for a December election, but as he will need votes from opposition Labour party MPs, he is expected to fall short. Labour party leader Jeremy Corbyn reiterated on Sunday that he will only back an election if there is zero chance of a no-deal Brexit. If the EU decides on an extension before the vote on Johnson’s election proposal in the Commons, then Corbyn might order labour MPs to vote for Johnson’s call for a general election, although he has explicitly said that he needs more than just a three-month extension by the EU to be convinced that a no-deal really is off the table.
If the EU extends Brexit to January 31st next year, with a proviso stating that any further negotiations on the withdrawal agreement are not allowed, then expect the pound to rise slightly to 1.290’s level. But it could fall back to 1.281’s level if UK lawmakers decide to back a general election for December without any indication that a no-deal Brexit is off the table.
It is more likely that the EU will grant a three-month extension and limit the UK’s room to negotiate on the current Brexit agreement. Also, we expect the majority of UK lawmakers to vote against Johnson’s proposal for a December 12th election. In that case, we forecast sterling to inch higher against the dollar to range between 1.285 and 1.295.
If UK lawmakers decide to vote against Johnson’s call to election, the PM is left with two options. He can either back the rival Liberal Democrats party’s proposal for a December 9th election (which is highly unlikely since that could potentially prevent parliamentary debates regarding the current Brexit agreement), or call a vote of no confidence in his own government in a bid to trigger an election.
Expect traders to wait for today’s outcomes in Brussels and the Commons, as both bears and bulls will likely try to fight for possession of Cable. If the EU decides on an extension today, expect the bulls to push the pound higher to 1.290’s level. But the bears will apply downward pressure on sterling should the Commons vote in favour of Johnson’s general election proposal for December.