Capital Markets: "Stunning Tory Victory and US-China Trade Boosts Risk Assets"
From Marc to Market:
Overview: The combination of a US-China trade deal and exit polls showing the Tories securing a majority in the House of Commons boosted risk assets, sent sterling flying, and the euro sharply higher. Separately, the Fed stepped up its efforts to make as smooth as possible funding over the turn of the year. Led by more than 2% gains in Hong Kong and the Nikkei, and more than 1% rallies in China and South Korea, the MSCI Asia Pacific Index rose the most in six months today. Europe's Dow Jones Stoxx 600 gapped higher and is up around 1.6%, the most in a couple of months in the European morning. US shares are trading firmer, and the S&P 500 is poised to gap higher as well.
Benchmark 10-year yields in Asia played catch-up to the rise in the US yesterday. Core European bond yields are up 2-3 bp today, while the US 10 year is consolidating around 1.88%. Peripheral European bonds have been supported by the demand for risk assets, and yields are lower there, led by a 2 bp decline in Italy. The dollar is softer against nearly all the world's currencies today. Sterling itself spiked to a little more than $1.35 on the immediate news and pushed back to about $1.3360 in the European morning, where new bids were found. Gold is firm but within well-worn ranges. January WTI is pushing toward $60 that capped it last week.
Asia Pacific
Details of the trade agreement that won the approval of President Trump are not known, but the simple fact that a deal was reached and that the tariffs that were threatened for December 15 would not be imposed helped spur a rally in risk assets in North America yesterday. The broad outlines include a commitment from China to buy much more US agriculture than ever before (~$50 bln) and step up protection of intellectual property in exchange for a 50% reduction in existing US tariffs and not implementing the December 15 levies. The offshore yuan (CNH) rallied by over 1%, and the dollar fell to around CNH6.9230, its lowest since August 1. Today, it has bounced back to about CNH6.9850-CNH6.9900. The dollar was bumping against the CNY7.0450 area most of the week but finished yesterday near CNY6.9850. It fell to CNY6.9600 today before recovering to little changed levels on the session....
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...Europe
The Tories scored an impressive victory. A majority of about 47 seats was secured, and the Tories won seats that were strongholds of Labour for a couple generations. It is the biggest margin since Thatcher in the late 1980s. Labour leader Corbyn resigned, and Lib Dem leader Swinson lost her seat, and the party will also pick a new leader. The Scottish National Party also turned in a strong showing, and it may be difficult to resist a new referendum at some point. Brexit will take place by the end of January, and the focus will shift to three things: new negotiations with the EU over the future trade relationship, the state of the economy, with fiscal stimulus promised, and Carney's replacement at the Bank of England. Carney is to step down at the end of January, and Shafik, the former deputy at the BOE, is seen to be a favorite.
Lagarde got glowing reviews for her debut press conference as President of the ECB....
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