European update – UK election, trade war, gold, oil

Massive week ahead

Monday morning is off to a more relaxed start, as traders ease their way into what could be an extremely eventful week for financial markets.

Source – Thomson Reuters Eikon

In many ways, investors have looked in holiday mode since Thanksgiving but the reality is that they’ve simply been waiting in anticipation of the next seven days. As is so often the case, we may be reflecting back on this a week from now as hugely anticlimactic, but there’s certainly huge potential for the opposite to be true. It’s going to be exciting.

The UK election on Thursday has been a long time coming and could finally break the Brexit impasse, one way or another. Polls haven’t been particularly reliable in the past and I don’t think anyone would be shocked to see another hung parliament, given how the last few years have gone, but traders appear to be feeling pretty confident about it.

Sterling finally broke above 1.30 against the dollar last week in a sign of confidence ahead of the vote and the currency is adding to those gains today. This is coinciding with polls showing the Conservatives clearly in the lead even as the Labour Party sees its position improve. A majority government still looks on the cards but this is hardly a straightforward election so more surprises may lie ahead.

There is still hope that a phase one trade deal between the US and China can be reached before 15 December, when $156 billion of new tariffs will come into effect. The talks continue as Chinese trade data showed exports contracting for a fourth consecutive month, although imports were better than expected suggesting domestic demand remains decent.

Still, it doesn’t take a genius to see that the trade war has severely taken its toll on Chinese trade. Unfortunately, as we’ve seen for months now, both sides have pretty high pain thresholds, which makes a deal far from certain. In fact, I wouldn’t be surprised if tariffs kick in and talks collapse completely. That would certainly make a santa rally this year unlikely.

Gold knocked by strong US jobs report

Gold prices are steady after plunging on Friday on the back of the bumper US jobs report. The report smashed all expectations and gave risk appetite a boost, which is naturally not great news for safe haven gold. Still, we’re a little way from the lows set in November and the last attempt on them fell short, which may give bulls some hope yet. I’m struggling to see much of a bullish case for gold at the moment, in the absence of a collapse in trade talks, with $1,440-1,450 still key and $1,400 below very interesting.

Gold Daily Chart

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Oil buoyed by output deal

Oil has made impressive gains over the last couple of months, including adding more than 5% in the second half of last week as OPEC and its allies agreed to deepen and extend production cuts. The cherry on the cake was Saudi Arabia’s pledge to cut an additional 400,000 barrels on top, taking actual cuts above two million barrels per day. Whether there’s compliance is another thing but the signs are promising and producers, particularly the Saudi’s after the Aramco flotation, will certainly be pleased with the current price levels compared to where they were early October.

Brent Daily Chart

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