Market Commentary 16th December 2019 from Charlie Hancock

The result of Thursday’s General Election was a positive outcome for the Pound and equities listed in the UK. Domestically exposed companies surged on Friday morning as the markets reacted to the news of a Conservative majority.

Banks and housebuilders fared particularly well during Friday’s trading. Barclays PLC saw their share price rise by 6.18%, with Lloyds Banking Group PLC rising by 5.25%. In the housebuilder sector, Taylor Wimpey PLC rose by 14.68%, Persimmon PLC by 12.01% and Barratt Developments PLC by 14.01%.

European equities were lifted by positive headlines on the US-China trade dispute. Throughout the week the tone was upbeat and on Friday it was confirmed that Washington and Beijing had reached a preliminary trade agreement (the ‘Phase One’ deal). The UK’s general election result also removed some of the uncertainty surrounding Brexit, which added to the risk on mood.

The announcement of a ‘Phase One’ trade agreement between the US and China was followed by comments suggesting that the two sides would begin further negotiations for the ‘Phase Two’ deal immediately. The US confirmed that new tariffs due to be implemented on Chinese imports worth $180 billion from 15^th December would be cancelled. In addition, it is expected that the next round of negotiations will see the US will offer significant reductions to the existing tariffs being imposed on Chinse imports worth around $360 billion.

Investors were relieved by the announcement of the proposed tariffs being cancelled, given that the likely outcome would’ve been higher prices for US households. The $180 billion worth of imports which are not currently subject to tariffs are mostly consumer goods, such as smartphones and electronic devices. With the US economy highly reliant on consumers to drive growth, the cancellation of the tariffs contributed to the risk on mood.

With Japan significantly impacted by the downturn in global trade, signs that the US may take a softer approach regarding trade during 2020 were well received by investors in Japan. The trade sensitive Nikkei 225 index rallied on Friday as a result.

The expectation and subsequent result of a Conservative majority caused the Pound to strengthen throughout the week, which lifted Gilt yields.

Investors in European assets were in a risk on mood for most of the week, however, with concerns around the health of the Eurozone economy still present, German Bund yields of all maturities remained at low or negative levels.

On Wednesday, the Federal Reserve confirmed its benchmark interest rate would remain unchanged and signalled that it expects to keep rates on hold throughout 2020. Comments from Fed officials suggested that the central bank is holding out for a meaningful change in the rate of inflation. The markets are not therefore expecting any rate cuts in the near future.

GBP / EUR – Current 1.1992 Previous 1.1880

With the Conservatives maintaining a healthy lead in all major Polls in the run up to the General Election, the Pound posted steady gains throughout the first half of the week. As the result became clear on Thursday evening, currency traders sought the Pound in increased amounts. Across the week, Sterling was up by 1.45% against the US Dollar and 0.94% against the Euro.