Politics, once again, frustrates the bulls
Whether you have been trading the pound or global stocks, the fizz has gone flat in financial markets as we move into the second half of this week. This type of thing can happen as we approach quarter end, however, it would remiss of us not to mention that politics, and corporate failures are also weighing on sentiment.
The FTSE 100 has had a poor couple of weeks; however, it has picked up off the lows on Wednesday, partly as a reaction to the weaker pound and partly due to some well-received corporate data. Sainsbury’s laid out its latest strategy that includes shifting Argos stores to inside its supermarket buildings, and a further £500mn of cost cuts through trimming its real estate portfolio and also cutting pension contributions. This helped boost the share price by more than 2% today, even though J Sainsbury has a long way to go to recoup 2019’s losses, the stock is down some 30% in the last 12 months. It looks like the bargain hunters are willing to grab onto any good corporate news, if they can get a stock with a low P/E ratio. Thus, Sainsbury’s could have further upside.
Why we aren’t positive on the FTSE
This news has shifted some of the attention from the collapse of Thomas Cook and bus operator Wrightbus, which dented sentiment to the UK’s corporate sector in recent days. However, we believe that the recovery in the FTSE 100 could be fairly shallow. The technical signals still suggest that the path of least resistance for the FTSE 100 is lower. The global back drop is also not helping stock markets across the globe, and we believe that this will, sooner rather than later, drag the FTSE 100 lower before the end of the week. US/ China trade tensions remain near boiling point, the Democrats in the US are planning an impeachment inquiry into Donald Trump, and Brexit concerns remain ongoing, after Parliament resumed business today after Tuesday’s court ruling. We continue to think that the FTSE 100/ GBP inverse correlation remains relevant for traders, and if we see that a no-deal Brexit becomes ever more untenable in the coming days, and an extension is asked for, then we would expect the pound to continue its bounce, which could weigh on the UK stock market.
Bring out the rennies, how to trade UK assets in this period of political indigestion
The resumption of Parliament has not helped the pound to find its footing, as GBP/USD has lost its grip on the $1.24 handle. A move below $1.2325 would be a breach of a key support level and could open the way to a move back towards $1.20. Politics remains the key driver of the pound for now, and the uncertain political waters makes it difficult to take a long-term view on the pound. While the eradication of a 31stOctober no-deal Brexit threat was good news for the pound last week, the prospect of a no-deal Brexit is still possible, according to the UK’s Attorney General. A general election (if it happens), may be pound negative, as the polls suggest that Boris and his merry band of hard-Brexiteers could win a majority, thus a no-deal Brexit collapse for the pound cannot be taken off the table. Politics are causing traders and analysts a fair amount of indigestion these days, which makes trading UK assets tricky. In our view, if in doubt, fade rallies, this applies to both the pound and the FTSE 100.
Does impeachment impact the stock market?
With the Democrats starting an inquiry into potentially impeaching President Trump, we decided to take a look at how the S&P 500 performed during Bill Clinton’s impeachment proceedings that started in October 1998. Back then the S&P 500 stood at approx. 1075, one year later, the S&P 500 was 1350. Although the S&P 500 had some pretty big dips during that period, it paid off to weather the political storms in the US and stick with the S&P 500. Of course, the late 1990’s were the heady days of the dot.com bubble, which suggests that the external economic environment can have a bigger impact on financial markets than the minutia of political spats in Washington.
So, history tells us that impeachment should not have a major impact on the direction of the S&P 500 in the long term. So, in the short term 3,000 may continue to evade US stock market bulls, but eventually this resistance level could be breached. However, there are some key differences between 2019 and 1998/99. Political interference in the global economy is at its highest level for many years, global trade has been disrupted by the US/China trade spat and Brexit. Thus, if the Democrats do succeed in impeaching President Trump, then we could see a larger impact on US and global stocks than we did in 1999.