Financial markets keep faith with Boris, for now
It’s election day here in the UK and the polls suggest that the vote could be on a knife edge. The most reliable election poll, YouGov’s MRP poll, put Boris Johnson’s margin of victory at 28 seats, down from the 68 seats that was predicted last month. The FT’s poll of polls, Minerva’s preferred poll, still expects the Tories to win 43% of the vote, compared with 33% for Labour, however after a series of missteps in recent days from Boris Johnson, the outcome looks more fluid than it has in recent weeks.
FTSE 250 takes the brunt of pre-election nerves
Considering a Labour/ Corbyn victory or minority-led government is considered to be a bad outcome for UK assets, you would expect the pound to reflect the narrowing in the polls, however, this is not the case and the pound rose above $1.32 vs. the USD earlier. GBP/USD has since given back some of its earlier gains, but GBP continues to look strong, and if it can keep up this momentum then it could be the best performer in the G10 this year. The FTSE 100 is up some 0.5% so far today, however, that is likely due to global factors that we will discuss below, rather than the political election at home. However, nerves are starting to set in when it comes to the FTSE 250, the broader FTSE index that is more domestically focussed. This index has been fallen some 300 points this week and has not been able to reclaim the high from the end of November.
While election nerves are likely to weigh on this index, we believe that the UK’s domestically focussed companies are coming under pressure because of the recent torrent of weak economic data. Manufacturing, services and construction were mired in negative territory in November, which increases the chance of the UK registering a negative quarter of growth in Q4. Thus, although the pound remains optimistic of a Conservative victory today and an end to the Parliamentary deadlock, the FTSE 250 is more concerned about the impact of weak growth on corporate earnings as we move into 2020. This index may experience a brief rally if the Conservatives do win a decent majority tonight, however, we believe the UK’s broader index of companies will need to see green shoots of growth before it can follow global stocks and sustain a long term rally and think about making fresh record highs above 21,500.
The tale of two oil companies
Also weighing on the FTSE 250 is the Tullow Oil saga. The company saw its share price fall some 70% at the start of the week after it downwardly revised its daily production target for the fourth time this year. Although production targets are an art and not a science, this was pushing investors’ patience to the limit and they finally snapped. The stock has picked up from the lows, it fell to a low of £40 per share on Monday and is now above £60, however, it may have to wait for a bid to cone in offering to buy the company before it can recover further, and this may not come until later in 2020.
Interestingly, some analysts were saying that the ferocity with which the market slashed Tullow’s valuation on Monday was partly due to the shift to a low carbon economy and the impact that this could have on Tullow and other mid-size oil companies’ profits in the future. However, although there is grave concern about the future of carbon, this did not stop Aramco, the Saudi oil group that listed on the Saudi stock exchange on Wednesday, from reaching a $2 trillion valuation on Thursday. The share price is up some 10% since its IPO, and the part privatisation of this behemoth has raised more than $25bn for the Saudi government. So much for the end of carbon. This listing has mostly attracted local investors in the Middle East; thus, its international appeal will need to be gauged once it joins emerging market indices that will be available to global investors. Brent crude is above $64 per barrel today and has been boosted by the “Aramco” effect. However, it’s fascinating that Aramco can do so well even though the oil price is significantly lower than the 2019 high of $74 per barrel back in April. This suggests that oil companies are not being ditched even as global leaders and institutions are talking about ways to drastically cut carbon to save the planet. The “Aramco” effect could also boost Tullow’s share price, which we may see continue to rise for the rest of the year.
Fed sounds upbeat on the US economy, but is it justified?
Elsewhere, the Federal Reserve meeting on Wednesday didn’t deliver any surprises. The Fed kept rates on hold and suggested that there will be no more cuts in 2020, however, it also ditched previous language that said there was “uncertainties” around the economic outlook. This has been taken to mean that the Fed is happy with the economic outlook for the US. It’s an interesting time to ditch the reference to “uncertainties” in the economic outlook since the US is a mere 3 days’ away from imposing another round of tariffs on Chinese consumer goods. US assets seem happy with the Fed’s outlook and are not acting like they expect the US to impose the tariffs that are scheduled for 15thDec. The S&P 500 remains comfortable above 3,100, and the dollar is a touch lower, which tends to be good for risk sentiment.
What to look out for in the next few days
Overall, if the US ditches the extra tariffs for Chinese goods then this should fuel the rally in the S&P 500 and other global risk assets through to Christmas. Likewise, if the Conservatives win a decent majority in the UK election (the exit poll will be released at 2200 GMT) then the pound could rally towards $1.33. However, as we have said before, we would beware of “buy the rumour, sell the fact” price action, and the pound rally may fizzle out even with a Tory victory, as the economic challenges facing the UK come back to the fore for the FX market.