UK Conservative Party Resounding Victory Paves The Way To An Orderly Brexit, Awaiting Confirmation Of US-China Phase-1 Trade Deal

Notes/Observations

Risk appetite sentiment buoyed by clarity of key global events…

• UK PM Johnson and his Conservative party won a resounding victory as voters backed his bid to deliver Brexit on Jan. 31st. The victory paved the way to an orderly Brexit
• US said to reached a deal in principle on trade with China; to reduce current tariffs and cancel planned Dec 15th tariffs (awaiting confirmation)

Asia:

• Japan Q4 Tankan Large Manufacturing Index registered its 4th straight quarterly decline and lowest in over 6-years (0 v 3e); Large Non-Manufacturing Index: 20 v 16e

Brexit:

• UK Conservative likely to win an outright majority of 86 seats in Parliament for its largest since PM Thatcher in 1987 (Conservative (Tories): 368 seats; Labour: 191 seats; Liberal Democrats: 13 seats; Scottish National party (SNP) 55 seats
• UK PM Johnson took notice of his mandate to get Brexit done. Americas: US said to have reached an agreement in principle with China on ‘Phase 1’ trade deal; President Trump said to have signed off on US-China agreement, which includes delaying new round of tariffs. Public announcement was expected on Friday
• US officials said to have offered to cut existing tariffs by 50% on $360B in Chinese imports; and also to cancel the new tariffs scheduled for Dec 15th

SPEAKERS/FIXED INCOME/FX/COMMODITIES/ERRATUM

Equities

• Indices [Stoxx600 +1.7% at 410.6, FTSE +1.6% at 7387, DAX +1.4% at 13402, CAC-40 +1.3% at 5958, IBEX-35 +1.7% at 9627, FTSE MIB +0.9% at 23600, SMI +0.4% at 10487, S&P 500 Futures +0.5%]
• Market Focal Points/Key Themes: European indices all up following the Conservatives winning a strong majority in the UK election, thereby alleviating some Brexit process uncertainty going forward. Indices in Asia higher and US futures also higher. FTSE 100 and 250 leading the European indices. UK banking, real estate and retailer shares are rallying. Barclays, RBS and Lloyds all up over 8%. Notable retail risers include Marks & Spencer and Associated British foods, as well as Barratt, Persimmon and Taylor Wimpey in the real estate space. Utilities shares jumped as the threat of a Labour renationalization has dissipated. In Germany, Henkel down on profit warning and guiding FY20 earnings declines yesterday after market close. Eramet down on cutting 2H profit outlook and Stabilus up on earnings results. On the M&A front, Delivery Hero rallying 16% on acquiring Korean company Woowa for €3.6B. EFG shares up on press speculation that Julius Bear may reach deal in Q1 to acquire the company. Altice up on selling half its stake in Altice Portugal FTTH and creating partnership with Morgan Stanley Infrastructure to create nationwide fibre wholesaler in Portugal.

Equities

• Consumer discretionary: Savills [SVS.UK] +11%, Persimmon [PSN.UK] +10%, Marks & Specer [MKS.UK] +8% (UK election results), Henkel [HEN.DE] -3% (outlook cut)
• Materials: Eramet [ERA.FR] -4% (profit warning)
• Financials: RBS [RBS.UK] +12%, Barclays [BARC.UK] +8%, Lloyds [LLOY.UK] +8% (UK election results)
• Industrials: Stabilus [STM.DE] +2% (earnings)
• Technology: Delivery Hero [DHER.DE] +12% (acquisition)

Speakers

• ECB’s De Guindos (Spain) reiterated Council view of seeing signs of economic stabilization (in-line with Lagarde recent press conference). Slowdown in region has bottomed out as disorderly Brexit and trade war between US-China have not materialized
• ECB’s Villeroy (France): Climate change raises stagflation risks
• ECB’s Holtzmann (Austria): Global trade has hit its trough
• ECB’s Vasiliauskas (Lithuania): Inflation target is key issue to discuss (refers to upcoming Strategic review) – UK PM Johnson stated that the election results put an end to threat of second referendum; to get Brexit done by Jan 31st
• German Bundesbank Semi-annual forecasts cut its 2019 and 2020 GDP growth forecasts. Cut 2019 German GDP from 0.6% to 0.5% and cut 2020 German GDP forecast from 1.2% to 0.6. It raised 2021 GDP from 1.3% to 1.4%
• Czech Central Bank Financial Stability Meeting Minutes: Stress test showed banking sector had enough capital in adverse scenario
• Japan Finance Ministry released the details of extra-budget and formalizes ¥4.5T of extra spending. To issue ¥2.19T in construction bonds and ¥2.23T in deficit-covering bonds

Currencies/Fixed Income

• GBP/USD initially surged over 2% to test above the 1.35 level in the aftermath of UK Conservative party resounding victory in Thursday’s general election which victory paved the way to an orderly Brexit. Cable tested an 18-month high as projections called for an 80+ seat majority in Parliament for the Tories. GBP retraced some gains heading into mid-session. The re-pricing of UK inflation expectations had already begun after sterling rose sharply. HSBA now called for a BOE rate cut in May 2020 as a result.
• Elsewhere the general risk-on appetite weighted upon safe haven currencies. Pending US-China phase-1 trade agreement sent the JPY weaker. The USD also encountered headwinds. EUR/USD edging towards the 1.12 level while USD/JPY was testing key resistance at 109.70.

Economic Data

• (NL) Netherlands Oct Trade Balance: €6.4B v €5.4B prior
• (NL) Netherlands Oct Retail Sales Y/Y: 5.0 v 2.8% prior
• (FI) Finland Nov CPI M/M: -0.1% v +0.1% prior; Y/Y: 0.7% v 0.7% prior
• (FI) Finland Oct Current Account Balance: €0.5B v €0.3B prior
• (FI) Finland Oct GDP Indicator Y/Y: 1.5% v 2.1% prior
• (DE) Germany Nov Wholesale Price Index M/M: -0.1% v -0.1% prior; Y/Y: -2.5% v -2.3% prior
• (TR) Turkey Oct Industrial Production M/M: -0.9% v +3.4% prior; Y/Y: 3.8% v 6.0%e
• (CN) Weekly Shanghai copper inventories (SHFE): 117.3K v 112.7K tons prior
• (FR) France Q3 Final Wages Q/Q: 0.3% v 0.3%e
• (ES) Spain Nov Final CPI M/M: 0.2% v 0.2%e; Y/Y: 0.4% v 0.4%e
• (ES) Spain Nov Final CPI EU Harmonized M/M: 0.0% v 0.0%e; Y/Y: 0.5% v 0.5%e
• (ES) Spain Nov CPI Core M/M: 0.3% v 0.8% prior; Y/Y: 1.0% v 1.0% prior
• (ES) Spain Oct House transactions Y/Y: -1.5% v -12.0% prior
• (RU) Russia Narrow Money Supply w/e Dec 6th (RUB): 10.62T v 10.54T prior
• (HK) Hong Kong Q3 Industrial Production Y/Y: 0.4% v 0.4% prior
• (HK) Hong Kong Q3 PPI Y/Y: 1.4% v 0.8% prior – (PL) Poland Nov Final CPI M/M: 0.1% v 0.1% prelim; Y/Y: 2.6% v 2.6% prelim
• (IT) Italy Oct Industrial Sales M/M: 0.6% v 0.2% prior; Y/Y: -0.2% v -1.6% prior (IT) Italy Oct Industrial Orders M/M: 0.6% v 0.9% prior; Y/Y: -1.5% v +0.2% prior
• (UK) BoE/TNS Nov Quarterly Inflation Expectation Survey: Next 12-months: 3.1% v 3.3% prior

Fixed Income Issuance

• (ZA) South Africa sold total ZAR1.04B vs. ZAR1.04B indicated in 2025, 2038 and 2050 I/L bonds

Looking Ahead

• 05:30 (RU) Russia Central Bank (CBR) Interest Rate Decision: Expected to cut Key Rate by 25bps to 6.25% – 05:30 (PL) Poland switch auction
• 06:00 (IE) Ireland Q3 GDP Q/Q: No est v 0.7% prior; Y/Y: No est v 5.8% prior
• 06:00 (IE) Ireland Q3 Current Account Balance: No est v -€2.7B prior
• 06:00 (UK) DMO to sell €B in 1-month, 3-month and 6-month bills (£1.0B, £2.5B and £2.5B respectively)
• 06:30 (IN) India Weekly Forex Reserve w/e Dec 6th: No est v $451.1B prior
• 06:45 (US) Daily Libor Fixing
• 07:00 (IS) Iceland Nov Unemployment Rate: No est v 3.8% prior
• 07:00 (MX) Mexico Oct Gold Production: No est v 6.4K kilograms; Silver Production: No est v 307.8K kilograms; Copper Production: No est v 40.0K tons prior
• 07:00 (RU) Russia Central Bank Gov Nabiulla post rate decision press conference
• 07:00 (IN) India announces upcoming bill issuance (held on Wed)
• 08:00 (UK) Daily Baltic Dry Bulk Index
• 08:00 (ES) Spain Debt Agency (Tesoro) announcement on upcoming issuance
• 08:30 (US) Nov Import Price Index M/M: +0.2%e v -0.5% prior; Y/Y: -1.2%e v -3.0% prior; Import Price Index (ex-petroleum) M/M: -0.1%e v -0.1% prior
• 08:30 (US) Nov Export Price Index M/M: +0.1%e v -0.1% prior; Y/Y: No est v -2.2% prior
• 08:30 (US) Nov Advance Retail Sales M/M: 0.5%e v 0.3% prior; Retail Sales (ex-auto) M/M: 0.4%e v 0.2% prior; Retail Sales (ex-auto/gas): 0.4%e v 0.1% prior; Retail Sales (Control Group): 0.3%e v 0.3% prior
• 10:00 (US) Oct Business Inventories: 0.2%e v 0.0% prior
• 10:00 (MX) Mexico Central Bank Economist Survey
• 10:00 (CO) Colombia Oct Manufacturing Production Y/Y: 1.5%e v 0.3% prior
• 10:00 (CO) Colombia Oct Retail Sales Y/Y: 6.8%e v 6.9% prior
• 11:00 (EU) Potential sovereign ratings after European close (Moody’s on Russia sovereign debt; S&P on Slovenia sovereign Debt; Fitch on France and Spain sovereign debt; Canadian debt agency DBRS on United Kingdom sovereign debt
• 13:00 (US) Weekly Baker Hughes Rig Count
• (CO) Colombia Central Bank Economist Survey