Thursday, December 12, 2019

Fed officials lean towards holding rates in 2020; will the Conservatives win today’s UK election?


Market recap: Global stocks rise on Fed’s optimism 

Yesterday proved to be positive for indices, after the Fed kept interest rates on hold while reiterating that next year should prove to be favourable for the US economy, despite ongoing global risks. More importantly, Fed officials were unanimous regarding to their latest policy decision. Projections showed that 13 of 17 officials do not believe there will be a change in interest rates until 2021. The other four believe there will only be one rate hike in 2020. US stocks gained after the announcement, with the DJIA, S&P 500 and Nasdaq recovering from two days of losses.


Meanwhile, the dollar retreated after the Fed signalled it could introduce looser regulations to help money market volatility. The greenback fell against all major currencies except the Australian dollar as a result. US Treasury yields also fell across the board.

Major currencies performance against the dollar

US Treasury Yields

Safe haven assets gained ahead of the UK general election, which takes place today. Gold also gained as the dollar weakened, while the yen also strengthened against the dollar.

4. Commodities

Meanwhile in Asia, equities are likely to track US gains today. The Nikkei and Straits Times Index opened Friday’s trading session higher, while Hang Seng futures also indicate that the Hong Kong Index will likely gain on the day.

Asia Equities

Markets will be busy today, with the European Central Bank (ECB) announcing its decision on monetary policy today at 4.45pm (GMT +4), along with the aforementioned day of voting in the UK. 

Today's Analysis: Conservatives look set to win, but is a hung parliament still a possibility?

Expect sterling to be highly volatile today and tomorrow as the British public head to polling stations today (voting will end at 4am (GMT +4) on Friday morning). The pound has risen over the past weeks, since British Prime Minister Boris Johnson called for a snap election in a bid to end the current hung parliament that has prevented his Brexit Withdrawal Bill from becoming legislation.

Conservative parties continues to maintain its lead over other parties

YouGov figures continue to indicate that the Conservatives will be likely victors, with most recent polls showing that they have extended their lead over the Labour party. As the Tories stay out in front, the pound continues to gain against the euro.

Sterling gained roughly 2.74% since elections were called and the Conservatives extended their lead

Possible scenarios for the general election outcome are: a Conservative majority; a hung parliament, or a coalition between Labour, the Liberal Democrats and the Scottish National Party. The best outcome for sterling would be a Conservative majority, as it would provide the most clarity on Brexit.

If Johnson and his Conservative party wins, then Johnson will likely try to pass his Brexit Withdrawal Bill through parliament as soon as possible. This will likely push sterling higher in the short term. But in the medium term, there may be downward pressure on sterling as the UK still has to negotiate a post-Brexit trade agreement by the December 31st 2020 deadline. As Johnson has signalled that he does not want to request an extension to the deadline, the market is likely to price in a higher chance of a no-deal Brexit. EUR/GBP is likely to tumble as a result, past 0.8418 towards 0.8410.

But if the result is another hung parliament, expect the pound to fall sharply, as the UK will likely request for another extension to the Brexit deadline or move out of the EU without a deal. Expect EUR/GBP to rise towards 0.8448. In the case of another coalition, sterling is likely to drop in the short-term before rebounding as markets price in a softer Brexit outcome. EUR/GBP will likely rise initially towards 0.8448's level before retreating lower.