A few things to ponder this Twixmas…
Liquidity may be thin on the ground at the start of this new week, but that does not mean that financial markets are boring. Cast your mind back to this time last year and you may remember that markets sold off quite sharply, while volatility may be significantly lower this year, we take a look at a few market moves that could determine trading conditions for January. We also know that it can be painful studying financial markets at this time of year, as the Christmas hangover kicks in, so we are here to do the hard work for you!
1, Stocks
Global indices have inched higher over the festive period, and the S&P 500, which currently stands at 3,240 is a mere 10 pips away from where we said it could end 2019, at 3,250. It has been a slow and steady rally for the US index since October, bar a blip at the start of December, which is interesting since the US and global economy has been mixed at best, and the US/China trade deal was only signed in December, however, the bullish tone to stock markets persisted. Stocks are poised to end 2019 having had their best annual performance for two decades. The question for traders is, can this performance be sustained into 2020? The arguments that it can include the ‘goldilocks’ environment for stocks, whereby economists are predicting a revival for the global economy, and the US/China trade deal looks close to being signed, after President Trump said that a deal was close on Christmas Eve, and a Chinese minister told China state media that both sides are arranging a signing ceremony. A strong global economy and a US/China trade deal have been priced in by financial markets for most of Q4 2019, thus, future strength for stock prices in 2020 may be dependent on the economic data showing that the expected surge in growth is actually happening. Not all analysts are so convinced that 2020 will be a vintage year for stocks, and we could see some investors rush to take profit as we move into January, so expect some volatility in the coming weeks.
An index that is appealing to us is the FTSE 100, it has lagged behind the US indexes, but has experienced a stunning rally since the Conservatives won a sweeping victory in the UK’s general election earlier in December. This index remains 100 points away from its peak in August when it reached 7720. At the start of the week the FTSE 100 has struggled around 7660 and has fallen to approx. 7620 at the time of writing. This could be recouped, however, particularly if the PMI data, released later this week, suggests that sentiment towards the UK economy has picked up. Going forward we believe that the FTSE 100 may continue to extend gains towards 8,000 and may experience larger positive reactions to any signs that UK growth is getting stronger after a dismal 2019.
2, The pound
The UK index and the pound tend to move inversely to each other; however, this link has broken down in recent weeks, and the pound has been on one hell of a journey in the last three weeks. After peaking at $1.35 after the UK election result, GBP/USD fell sharply towards Christmas, plateauing just above $1.29 on the 23rdDecember, the last working day of the year for many people in London’s financial centre. However, traders were not finished with the pound for 2019. This pair has risen by a decent 200 pips since then and is currently trading above $1.31. This pair is approaching some key levels that it is worth watching out for in the coming hours and days: $1.3140-50 – the 38.2% Fib retracement of the 13thDec high to 23rdDec low, and then $1.3220, the 50% retracement of the same move. These levels could act as key resistance levels in the coming days. In the short term, if the pound can rise above these key hurdles then GBP/USD is likely to start 2020 on the front foot and could regain $1.3500, however, if the market does not have the will to break above this level then it suggests that GBP bulls remain thin on the ground, and that a rally in GBP may be some way off.
As we mention above, the key driver of the pound going forward is likely to be twofold: 1, sentiment around leaving the EU and getting a trade deal signed before the end of 2020 deadline, and 2, a recovering economy. Any set back in either of these and we could see GBP struggle.
3, ESG investing comes to the fore
This was one of our biggest themes for 2020 that we included in our previous post. However, Mark Carney, the outgoing BOE governor has given our theme a big boost by saying that companies could see many of their assets become worthless if they do not act swiftly enough on climate change. You may say that of course he would say that as he is about to become the UN special envoy for climate change and finance, however he has a point. Credit rating agencies are already saying that they could downgrade “controversial” companies that are engaged in fossil fuels, tobacco, weapons etc. Banks who lend to these companies are also at risk. Thus, corporate risk could be a key theme for stock markets next year, and we may see investors shun oil and energy companies if this theme continues to gain traction. If this comes to pass, then the FTSE 100 could be at risk due to the large number of energy companies in the UK index.
Interestingly, although ESG is a theme on investors’ minds right now, it hasn’t stopped the price of oil from recovering strongly. Brent crude recovered from $60 per barrel in early December to $68 dollars before coming off at the start of the week. While the oil price remains at a decent level we don’t think that the oil majors such as BP, Shell etc will see their share prices fall sharply any time soon, although oil companies have been major under-performers in global stock markets this year. Regarding the UK oil price, we continue to think that it could move into a $65-$70 per barrel range for the first month of the new year, however, global oil majors may continue to see their stocks slide, as they have today on the back of Carney’s comments, unless they quickly shift to low or no carbon technologies and businesses. Expect strategists and green research projects to abound at oil companies in 2020, as they become an essential ingredient to protecting their share prices in the next decade.