Equities rally after moves on trade, Hong Kong elections

Morning Note

Asian and European markets rallied early Monday after some more positive steps on trade, whilst the fallout from Hong Kong elections on Sunday will need to be closely monitored for their impact on the protests and risk sentiment. 

On trade, it’s the usual Washington two-step – one step back, another step forwards. The picture on trade remains rather muddy, not least because of the incendiary situation in Hong Kong that is becoming increasingly ‘economized’, but the latest developments will likely lend support for risk. 

Over the weekend US national security adviser Robert O’Brien said a ‘phase one’ trade agreement with China was still possible before the end of the year, but added that the White House would not ‘turn a blind eye’ to events in Hong Kong. Earlier, Donald Trump had said the protests and the response from Beijing had ‘a tremendous negative impact’ on the trade talks. 

Cue a landslide victory for pro-democracy candidates in local elections in Hong Kong which saw a record turnout. The pro-democracy candidates controlled all but one of the 18 districts it seems. This is a humiliation to Beijing – there is no silent majority backing Carrie Lam and co – it will only embolden the protest movement further, which of course carries risks for investors.  

But we’ve had progress in an important area – China has appeared to relent to a degree on intellectual property, a key sticking point to the talks thus far. Beijing on Sunday said it will increase penalties for IP violations, and lower the bar for criminal proceedings to be brought in cases of alleged IP theft. This could be an important step forward, but we as ever will only believe it when we see it. The focus is on agreeing some kind of phase one deal before the Dec 15th deadline for about $150bn in tariffs to raise. 

Last week, US indices snapped a six-week win streak but did manage to rally Friday. European indices were also strong risers on Friday.

Friday saw a big pullback for the euro as the US dollar rallied heavily. Today we have the German Ifo business climate report, which may threaten to knock a few spots off the euro again. We also will be keeping an eye on Jerome Powell’s speech later. 

EURUSD was at 1.10260 and eyeing the support at 1.0990, a break of which would call for a pull back to around 1.0950 and then the Oct low at 1.0880. 

USDJPY just won’t roll over entirely and was last at 1.0880, seeking again to surmount 1.09 and the 200-day line first at 1.0890. The 50-day line is offering support around 108.275. 

GBPUSD is trapped in its range between 1.28 and 1.30 – expect it to remain so. Polls indicate the Conservatives are stretching out – one poll over the weekend shows the Tories with a 19-pt lead with 47% of the vote. This ought to lend support but we await to see whether the dollar can extend gains posted on Friday.

Oil – The uptrend remains in force as markets eye a potential expansion of crude output cuts by OPEC. Net longs increased to 430k contracts according to Friday’s COT report from the CFTC. Upside break to $58 on Wed/Thu has not been sustained entirely but the 200-day line around $57.50 starts to offer support. 

Gold – bearish trend persists with the rally off the $1445 low rather lacklustre and losing its mojo early. But speculative long positions increased in the last CFTC report to net +285.9k. As traders bulk up on long gold positions it may indicate the market is poised to retrace some of the recent drop.