Markets were pretty strong this week and it appears that they were anticipating the positive events of yesterday.
First, the UK election delivered a resounding majority for Boris Johnson and has created some, if not complete, clarity around Brexit. With one constituency left to declare, the Conservative party has won 364 seats, giving it a majority of 78, a figure that surpassed expectations set by both regional and constituency polls.
The strategy of focusing on the ‘Workington Man’ paid off handsomely and this result has some important stock market implications. The uncertainty engendered by a squabbling UK parliament was unhelpful to UK and European risk assets and it is this uncertainty that has been lifted. The UK will leave the EU at the end of January 2020 and enter a transition period during which a free trade deal will be negotiated with the EU.
The bears will have you believe that this only extends the agony and that the UK will crash out of the 2020 transition period without an agreed trade deal. Yet this appears to be increasingly improbable. Boris Johnson did not back the Leave campaign because he was obsessed about leaving the EU; he backed the leave campaign in order to become Prime Minister. Furthermore, his majority is now so large that he is no longer beholden to the hard-right Brexit wing of his party, which may push for a harder deal than the one the EU would wish to give. Having achieved his life-long ambition to get the chance to emulate his idol, Winston Churchill, it is unlikely that he will want to upset the UK economy less than 13 months into his premiership by driving it over a cliff edge. It is much more likely that he pivots and gives himself more time to negotiate a free trade agreement with the EU.
Indeed, considering his time as Mayor of London, the real Boris Johnson is likely a ‘One Nation Tory’ and soon – to use language from Eminem – he may stand up. This should be positive for UK and European risk assets.
Sino-US Deal Close?
Second, regarding the other main market worry of the Sino-US trade deal, sources close to the US administration keep leaking that they are close to a phase one deal. Reportedly, the deal has received approval from Trump whilst the legal document is being written-up, with an announcement expected later today (Friday) from the White House. The reports are that the deal includes set purchases of US agricultural goods by China whilst tariffs will be removed, specifically the ones due to be triggered on Sunday 15th December. It would be hugely disappointing for markets if this turns out not to be true.
At time of writing, in today’s trading these two developments are pushing equities higher whilst risk-off assets, such as bonds and the US dollar, are declining.