Trump, trade, payrolls and Corbyn dominate markets

The big news on Wednesday is that GBP/USD has jumped back above $1.30, which is a major achievement considering we are just over a week away from a crucial general election. Asian stocks took a beating after Donald Trump suggested that a trade deal may have to wait until after the November 2020 US Presidential election, dashing investors’ hopes that a deal could be signed in early 2020. European stocks are a mixed bag so far this morning. 

Why the pound is rallying 

Analysing pound strength this morning, a major driver is the latest opinion poll from KantarTNS, which suggests that the Conservatives maintain a decent lead over Labour at 44%, versus 32%. Donald Trump’s comments that the NHS is not on the table in a UK/US trade deal post Brexit could help drive further support to the Tories, with moderate centre voters deciding to go with Boris rather than take a risk with the hard left and Corbyn. So, for now, the pound is reflecting a strengthening Tory lead, and if it stays this way then from a technical perspective, the gates are open for a move back to $1.32 in GBP/USD, which is the highest level since 2ndMay. However, upward momentum will depend on the Conservatives maintaining their lead, and a week is a long time in politics. 

The most likely outcomes from the UK general election 

At this stage, the two most-likely outcomes from this election look like either an outright Tory majority or a hung parliament. If we get a hung parliament then the outcome for the UK would be less certain, however, even if Labour did lead the government, the fact that they would need to rely on the support of other parties such as the SNP and the Liberal Democrats may mean that they would have to temper some of their tax and spend plans, which could limit financial market downside on the back of a result that didn’t see the Tories win. The worst outcome for UK asset prices, in our view, is a Labour majority, and as the probability of this happening falls then we believe the pound will continue to rise. 

Trump’s tariff talk – do we believe it? 

Elsewhere, US stocks have had a weak start to December after a double whammy of Trump tarriff talk and a disappointing ISM manufacturing number for November. This has also weighed on the US dollar, and the dollar index has dropped from 98.50 5 days ago, to 97.60, where it has managed to attract some buying interest this morning. We believe that dollar has the best chance of recovery vs. the JPY and EUR this week, especially if the non-manufacturing ISM report, the ADP and NFP report for November all beat expectations. As mentioned above, GBP/USD is likely to be dominated by the UK election in the coming days. USD/JPY has managed to pick up from the 108.40 lows and may target 108.85 in the short term. We wouldn’t take Donald Trump’s comments about the US/China trade deal as gospel, there is a good chance that he could moderate his language in the coming days and say that a trade deal early next year remains possible. If he softens his rhetoric then this may give the dollar a welcome boost. 

The NFP report for Friday is worth watching closely, as this is a key signifier of US economic health. The market expects a decent 180k, and if expectations turn out to be accurate, then this could be a key driver of US stocks and the dollar into the end of the week. 

Also worth watching is Alphabet, the parent company of Google. iT announced that its two founders are standing down from day to day management of the company. The current Google CEO, Sundar Pichai, will take over the CEO role at Alphabet. Pichai is considered a safe pair of hands, thus we doubt that this move will have a major impact on Alphabet’s share price, which picked up slightly on Tuesday. Alphabet’s share price has struggled to keep pace with the overall US index, and remains below its November 15thpeak at 1335, which is the high for 2019 so far. We doubt that this news will boost Alphabet’s share price to a fresh 2019 high, and instead we may need to see improved US/China relations for Alphabet and other tech stocks to make fresh highs before year end.  

Watch out for our UK election special, to be released later this week.