US Open – Brexit is Coming, Trade Progress, Dollar tumbles, Oil rises, Gold’s resilience

Last night was a historic night for Boris Johnson as his Conservative Party delivered a crushing election victory over Labour.  Johnson’s party tore down the “Red Wall”, just like Viserion the Ice Dragon did at the end of season 7 in Game of Thrones.  A ton of uncertainty has been lifted for the UK economy and investors are rejoicing that Brexit is finally coming. 

Johnson has secured a convincing majority in Parliament that paves the way for him to finally deliver Brexit.  Green across stock market screens could remain the theme for a few more days.  Global risk appetite is turning a corner here as two huge headwinds, Brexit and the US-China phase-one trade deal, are about to become tailwinds.  With a disorderly Brexit off the table, the focus will shift to Brexit transition phase and the lengthy negotiations the UK government will have with all of their major trading partners.  Brexit is nowhere near from over, we just passed the 10-mile marker in this marathon that is Brexit.   

GBP

The British pound’s massive appreciation may struggle for further gains in the short-term as uncertainty remains on how aggressive Boris Johnson will be in trying to deliver Brexit.  Following its biggest rally since 2017, sterling could now see itself target the 1.34 to 1.3950 range as expectations are strong for the UK to leave the EU in an orderly fashion. 

UK stocks are surging after yesterday’s historic election saw nationalization fears disappear.  The Wall Street consensus has now fallen back in love with UK equities and expectations are high for the FTSE 100 Index to outperform the other major indexes over the next few months.  Since Brexit vote in 2016, the FTSE 100 index has trailed the S&P 500 index by almost 50 percentage points and the MSCI Emerging Market index by 25 percentage points.  

Gilts are plummeting and could see further losses as rate cut odds continue to dwindle. 

Trade

Global stocks rallied to record territory for the first since early 2018 after President Trump signaled the December 15th new tariffs will be put off and we could eventually see the older ones reduced.  The White House is expecting to make an official announcement later today.  Investors however are growing anxious that we have yet to hear China confirm the deal on their end.  Both sides are highly motivated, and this deal will pave the way or China to maintain their GDP growth target at around the 6% level.  The bull case for US stocks is firmly in place for 2020 as trade doubts ease and after the Fed signaled, they are not raising rates anytime soon. 

The overvalued dollar could be at a critical turning point as European optimism could be what is needed to finally to see it break.  The currency story in 2020 might be Europe rebounds, ECB Chief Lagarde makes a push to exit negative interest rates, combined with a Fed indefinitely on hold, will help drive EUR/USD towards the 1.2000 region. 

Oil

West Texas Intermediate crude’s price barrier that is the $60 a barrel seems poised to break.  From a macro-economic perspective oil prices could rip higher after both trade and Brexit uncertainty have been alleviated in the short-term. Oil could still rally another 5% here, despite oversupply concerns for the first half of 2020, because investors have been overly negative with their demand side forecasts. 

Gold

Gold has remained resilient throughout the 24-hour wave of global risk appetite because the dollar is finally breaking.  It seems remarkable that gold is higher after a phase-one trade deal seems imminent, Brexit no-deal risks have been wiped out, and we are in the midst of a massive global stock market rally.  Gold could see further momentum after the euphoria of this risk-on move is faded.  Investors will still have appetite for safe-havens as we enter a very lengthy Brexit transition phase and are not anywhere close to seeing a broader US-China trade deal.     

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