Markets shrug off US/China risk and get down to turkey

There’s a strange silence in financial market centres around the world today. The normal whirr and tap-tap of computers is taking a temporary break. It’s Thanksgiving and while it’s a long public holiday in the US, the rest of the world is acting like it’s a half day. That is what price action would suggest, anyway. European stock indices have nudged fractionally lower so far on Thursday, and FX markets have barely budged all morning. Market liquidity is likely to remain thin through to next week, and not even some major breaking news could disrupt the calm in financial markets today. 

Due to this, we have decided to analyse three themes that we think could be market moving up until year end. 

1, The US/China trade deal

Did anyone wake up like I did to a news alert on a mobile phone claiming that President Trump had signed a Senate Bill, the Human Rights and Democracy Act, into law late last night and that China was furious? This act mandates an annual review to check if Hong Kong has enough autonomy to justify its special status with the US and is a political reaction to the protests that have gripped Hong Kong for months. China immediately warned the US that it would take “firm counter measures” for interfering in its politics. However, those fearing for the state of the phase 1 talks in the US/China trade deal as a result of this latest fracas need not worry too much. We believe that this Act will not weigh on the trade talks and that the US and China remain in a more promising spot to sign a deal this week than it did a couple of weeks ago. 

In a carefully worded press release that accompanied news that the President had signed the act into law, the White House said that the US President had to sign the bill as it was widely supported across Congress by both Democrats and Republicans alike. The President was also quick to say that he signed the bill out of ‘respect’ for China’s leaders. Even though China swiftly responded to events in Washington, Beijing often criticizes any other country if it considers that it is interfering in its domestic business. The comments have not escalated, and the issue of the trade talks has not been brought up by either side. This suggests that Presidents Trump and Xi may have had a “gentlemen’s’ arrangement” before President Trump signed the Act into law. Price action also suggests that those who are trading today are not too worried about it either, USD/JPY fell some 20 pips on the news and has now clawed back half of its gains. This pair could be on track to recoup all of today’s losses if it can maintain upward momentum and break above 109.60. 

Overall, the big date to keep in mind for US/China trade relations is 15thDecember, that is when the US is set to impose another set of trade tariff on imports of Chinese consumer goods. If the tariffs are implemented then risk will likely sell off as it would be a clear signal that US/China trade talks are not going well, if the tariffs are delayed or cancelled, then risky assets may rise as it would suggest that talks are going well. When it comes to China and the US, don’t worry about events overnight, enjoy your turkey. 

2, UK elections 

A major poll released late on Wednesday said that the Conservative Party would win a 68-seat majority at next month’s election, according to the MRP poll for the Times newspaper. If correct, this would be one of the worst results for the Labour Party in the post-war period. Unsurprisingly, the pound rose on the news. Firstly, this poll was the most accurate in the run up to the 2017 election, so it is well-trusted; secondly, if this poll is correct then it should ease fears that a hard-leftist government is on the cards for the UK. Of course, polls are inherently risky to trust. There is still two weeks to go before polling day and that is a long time in politics. Also, some analysts have pointed out that it is hard to predict who will win seats at this election due to tactical voting by both leave and remain voters and voters switching party allegiances at an alarming rate. Thus, while this poll suggests that it’s the Conservative Party’s election to lose, take all polls with a pinch of salt. 

The market reaction is also worth watching. The pound spiked immediately after the poll was released last night, since it gave the Tories an even larger majority than what was expected. GBP/USD reached a high of $1.2950, which is the highest level for more than a week. However, it has since dropped more than 30 pips as the rally has been sold. This could be down to three things: 1, traders have wizened up to the dangers of following the polls too closely, 2, sterling was wounded in the mini rush to safe havens on the back of the US/China story, the euro is also weaker today. The third factor could be the latest news from the Institute for Fiscal Studies which says that neither Labour nor the Conservatives have offered a “credible prospectus” for government during this election campaign. It said that the Tories would spend more than they are suggesting, and that Labour could never afford all of their promises. Perhaps the thought of chronic financial mismanagement under both parties is weighing on the pound today? Overall, the pound remains ready to rise above $1.30, in our view, but only when Boris Johnson has his feet safely inside the door of Number 10 Downing Street on 13th December.

3, Green risks 

The impact of climate change could be a major theme in financial markets going forward and the environmental credentials of a corporation will need to be analysed closely before making investment commitments. This comes after Moody’s, the credit ratings agency, said it was considering stripping US oil giant Exxon Mobil of its triple A credit rating due to the risks that oil majors face as the world moves towards a lower-carbon environment. You may think that this doesn’t apply to you, but Exxon Mobil makes up a sizeable chunk of US stock indices. Also, banks across the world could also be at risk, particularly if they have large credit lines and loans out with energy producers. This theme may be in its infancy, and we don’t think that any oil major’s stock price will start to tank imminently, however, governments and central banks are starting to focus on the environment, and we expect this to continue. Yesterday, the ECB said that it is pushing for climate change to be part of a strategic review of the ECB’s central purpose and going forward environmental concerns could be a central part of monetary policymaking. 

Thus, if you are considering trading stocks, make sure you consider the company’s environmental footprint, as changes in global rules and laws that focus on the environment could become a risk factor for the stock market in the coming months and years. On the FX front, one has to assume that in time if the economies of Norway, Canada and Australia don’t switch to more carbon neutral industries then these commodity currencies could also be at risk. 

To finish, we would like to thank you all for reading Minerva Analysis, we appreciate it!