The Week Ahead: The End of the Beginning

The huge week we anticipated last week didn’t disappoint! The UK general election produced a thumping victory for theConservative party, giving some much-needed clarity to the domestic political situation and Brexit. The US and China also agreed to a phase one trade deal after 18 months of escalating tensions. Which way either of these events moves sentiment over the long-term is now the bigger question.

Boris Johnson’s historic victory means that the UK is very likely to leave the EU in January as his large majority will mean his Brexit deal should pass smoothly through Parliament, with the vote potentially this Friday after the Queen’s speech the day before. 

The largest Tory majority in over 30 years also increases the chances of some transparency returning to the business sector and certainly avoids the Labour threat of a large rise in corporation tax and the nationalisation of the utility sector. This should be positive for both business and consumer confidence, at least in the short term, with a gradual acceleration in GDP growth and confidence.

The key caveat here is that a Conservative majority has been largely priced into UK risk assets and sterling, so some of the exuberance has been reigned in as focus quickly turns to whether the transition period will be extended. Does the hefty majority embolden PM Johnson to take a firmer stance in negotiations with the EU? That is highly possible which would go against the argument that the path of least resistance is a softer exit negotiating a close trade relationship during the transition. Indeed, the EU may well be sequencing the negotiations again to maximise their leverage and it is this which could define Johnson’s first full year in office. 

In the meantime, this Thursday sees a Bank of England interim meeting with no changes expected, despite the weaker economy and softer policy signal. A cautious stance is likelyas the MPC monitors the scale of the investment and confidence rebound into the new year. It’s also a bumper week of data with flash PMIs still in contractionary territory and October’s labour report a focus as soft indicators are suggesting further weakness.

Details of the phase one agreement between the US and China remain largely unknown, with no signing ceremony and Chinaapparently demanding that the language never be made public. It seems markets don’t particularly trust either side at the moment – a prime example being the idea of China buying $50bn of agriculture goods from the US every year. Thiswould mean China not only having to restore its purchases to 2017 levels, but then increase them a further two and a half times – hogwash experts say! This week may hopefully give us a sense of the new mood between the two countries and the likelihood of a phase two deal next year. 

With the Fed clearly indicating last week that they are content with the current state of the economy, markets won’t be too concerned about the upcoming data as we head towards year-end. The most interesting releases should be the PMIs for December out later today. While they have moved slightly higher recently, the overall picture is still that Q4 GDP has been slower than the previous one.