Friday, November 22, 2019

All eyes on Christine Lagarde's speech; does sterling have more room to strengthen?

  • China
  • Dollar
  • Gold
  • Yen

Market recap: Investors grow more cautious on US-China partial trade deal

US equities fell as uncertainty on the US-China trade war continues to plague investor sentiment. But news that China is still willing to work with the US to resolve the trade dispute with the US and a report from the Wall Street Journal that China has invited top US trade negotiators for additional trade talk in Beijing helped to curb losses on Thursday. The DJIA fell 0.20%, the S&P500 lost 0.16% and the Nasdaq retreated 0.24%.

Meanwhile, demand for safe havens fell on Thursday after China's top negotiator said he was cautiously optimistic about reaching a phase one deal with the US. Gold fell 0.49% and the yen weakened slightly by 0.02% against the dollar. US Treasury yields gained across the board, with benchmark 10-year yields gaining 3bps to 1.77%.

Most major indices in Asia started Friday higher. The Hang Seng Index and the Straits Times Index gained 0.45% and 0.24% to start the day. Japan's Nikkei Index opened Friday’s trading sessions lower but recovered later and was 0.66% higher than Thursday’s close as of 5.26am (GMT +4).

October’s monetary policy meeting minutes by the European Central Bank (ECB) failed to surprise investors on Thursday. The minutes reiterated the need for fiscal stimulus from governments and for the ECB’s Governing Council to be united. EUR/USD fell 0.13% on Thursday although the fall was more likely due to the stronger dollar. Euro traders will likely be focused on ECB President Christine Lagarde's speech today at 12.30pm (GMT +4) for any hints of her view on monetary policy. The newly appointed president has yet to comment on her stance on monetary policy since she stepped into her role on November 1st.

Today’s Analysis: The Conservative Party looks likely to regain majority from early polls

The pound reached a six-month high against the euro on Monday, November 18th, pulling EUR/GBP down to as low as 0.8548. The stronger British currency comes after the UK dissolved its parliament on November 6th to prepare for a snap election called by British Prime Minister Boris Johnson set for December 12th, in a bid to try to regain majority for the Conservative Party in the House of Commons to more easily pass his Brexit deal through parliament.

The Conservative Party currently takes the lead in polls conducted by British data analytics firm YouGov, pulling ahead by 17 points over its strongest competitor, the Labour Party.

A Conservative majority in parliament is likely to drive the pound higher as Johnson's Brexit deal is more likely to pass through parliament, reducing uncertainty on the UK’s future. The most recent debate between Johnson and Labour Party leader Jeremy Corbyn on November 19th, signalled to investors that Corbyn is undecided on his stance on Leave or Remain for Brexit after refusing to directly answer the question nine times in the debate. YouGov's poll of 1,646 viewers immediately after the debate showed that overall viewers were relatively mixed on both leaders’ arguments, with 51% of viewers feeling that Johnson's performance was better after the removal of "don't know" responses.

As Corbyn looks undecided on his Brexit stance, the Labour Party may possibly lose seats to the Liberal Democratic Party which strongly opposes Brexit. If this happens, the Conservative Party is more likely to gain the majority in parliament as Labour Party (Conservative Party’s strongest competition) seats in the Commons reduces. Johnson is likely to focus his campaign on completing Brexit to try to sway pro-Brexit Labour supporters to vote for Conservative Party candidates.

If polls indicate the Conservative Party’s lead is starting to diminish, sterling is likely to fall, with EUR/GBP possibly rising towards 0.8597's levels. But if the Tories maintains its lead or if Labour Party falls in polls, then the pound is likely to strengthen as Tory MPs look more and more likely to regain majority, signalling to markets and businesses that the Brexit agreement may possibly be completed by the January 31st deadline in 2020. EUR/GBP is likely to continue to fall towards 0.8485 if the Conservative Party can maintain or extend its lead in the polls until December 12th.

But during the general election called by former British Prime Minister Teresa May in 2017, the Tories lost their majority in the Commons despite being ahead in the polls by 7 points over the Labour Party. This means the election results can deviate from polling results.

If Tories lose more seats on December 12th even after leading in election polls, then the pound will likely experience a sharp fall, as Brexit is less likely to make any progress.