Thanksgiving week: reflecting on the next stage for equities, and is the dollar resurgence for real

At the start of the new week a few key themes are developing. Firstly, the growing divergence between US and European/ UK growth rates and the impact that this could have on stock price performance on both sides of the Atlantic. Secondly, could there be a breakthrough in the US/China trade war, after US President Trump said that a deal is possible and both sides appear to have made concessions in a bid to get a deal done. Across the pond, the Tory manifesto could boost the pound, and lastly, will Black Friday show the might of the US consumer once more? 

Why US stocks continue to look strong 

Looking at diverging growth rates first, the preliminary PMI data for November, released last week, showed a marked difference between the US and Europe – the latter is growing, while the former is stuck in contraction territory. This weighed on the euro and the pound at the end of last week, and boosted US stocks and the dollar. At the start of the new week, the dollar continues to extend gains while the euro continues to stumble. The pound is regaining some lost ground after the market reacted positively to the Conservative manifesto, which limits borrowing and has helped the Tories to maintain a double-digit lead over the Labour Party in the latest opinion polls, see more below. 

We believe that US stocks continue to look strong, and we continue to think that a break above 3,250 in the S&P 500 is possible before the end of the year. A recovering manufacturing sector, the November PMI rose back above 50 - the level that is considered expansionary, along with a resurgence in the services sector, is positive for US stocks in our view, and we believe that the S&P 500 can return to its winning ways. This week market liquidity could be patchy due to the Thanksgiving holiday. Markets in the US are closed on Thursday, and hours are shortened on Friday, so we expect the next clear trend for US stocks to emerge next week. By then we should have the latest details about Black Friday and the strength of the US consumer. Analysts are in bullish mood, expectations for retail sales growth in November and December are expected to grow 3.8% vs. 2018, which is a decent jump, and suggests that the US consumer is back to their confident, spendthrift ways. A strong US consumer is a very important part of the equation for the US equity market rally. If the consumer does live up to expectations this Friday, then it could protect US equity indices from the inevitable twists and turns in the ongoing US/China trade deal.  

Prospects of a US/China trade deal look good, yet again 

Stocks across the world are rising this morning as the market warms to the latest comments from President Trump that a US/China trade deal is still close. While fears for global trade haven’t caused a large decline in global stocks in 2019, the rhetoric from both sides have had the potential to trigger pockets of volatility. When the rhetoric makes a trade, deal look possible we tend to see global stocks rally, like we are seeing today. As long as this vibe lasts then we may see continued gains for stocks in the next couple of days. While both the US and China are playing hard ball, the most recent actions from both sides could be conducive to a trade deal. Firstly, China has taken steps to strengthen intellectual property rules, which is a key request from the US. Likewise, last week China threatened to delay a trade deal if the US “interfered” in the Hong Kong clashes. President Trump told Fox News at the weekend that he wouldn’t sign a Senate Bill condemning China for its actions in Hong Kong, which could placate Beijing. As we mentioned last week, the key test will be if the US initiates another round of trade tariff on December 15th. If it cancels these then we could see global stock surge into year-end as investors assume a trade deal is in the wings for early 2020. 

Growth fears weigh on the euro 

Elsewhere, the German IFO data was roughly in-line with expectations earlier on Monday.  This survey of factory sentiment picked up from the October readings, and suggests that Germany is moving out of recession territory. Signs that Germany is gaining some resilience, even without a signed US/China trade deal, should boost the Dax. The Dax has picked up slightly this morning, alongside other global indices, and it remains a mere 100 points away from the November high at 13,360. If we continue to see an improvement in the rhetoric between the US and China, then we expect this level to be targeted by Dax bulls in the coming days. The weaker euro could also boost the Dax index this week; EUR/USD continues to look weak after the disappointing November PMI numbers last week. This pair is at risk of losing the $1.10 handle, however there is key support at $1.0990, which euro bears need to watch closely. A break of this level would suggest an extension of euro downside is possible, with $1.0950 coming into view. 

The pound: politics not economics continues to drive the UK currency 

The pound is in recovery mode this week, and a return to $1.29 in GBP/USD looks possible in the short-term. We continue to think that politics takes preference over economic data, as we lead up to the election on 12thDecember. This is lucky for the pound, as the economic data is fairly miserable, with both the manufacturing and services sectors showing a decline in November. We believe that an uptick in the data is possible, however, we need to get election risk, and Brexit risk off the table first, and this may not happen until early 2020. As long as the Tories do win a decent majority on Dec 12ththen we should see the pound continue to recover and a move above $1.30 is possible by year end. The fact that the Tory manifesto said that there would be no extension to the period where the UK and Europe negotiate a trade deal, which currently expires at the end of 2020, has been ignored by the markets, so far. This is a very ambitious time scale, considering EU trade deals tend to take years, even decades. We believe that even though this statement in the manifesto could still see us leave the EU without an actual trade deal, the market is looking on the bright side, and assuming that our politicians are not stupid enough to adhere to a deadline that could see us lose out on a trade deal with our largest trading partner. We shall have to see if the market is right to be optimistic. 

Hong Kong election boosts stocks 

Elsewhere, the big win for pro-Democracy candidates in the Hong Kong elections has boosted the Hang Seng, the next step will be to see how China reacts to the election result. If they refuse to acknowledge the result then the Hang Seng could be at risk from a sell off, although we think that this is a low probability event in the short term, with China preferring to maintain the status quo for now. 

Looking ahead, the markets are likely to be fairly quiet from Wednesday, and liquidity could dry up, so traders should be careful of pockets of volatility in the coming days. This is a good week to give thanks for the trading gains of 2019 so far, and if this year has not been so good to you, to reconsider your trading strategy for the last few trading weeks of the year.