Notes From the Trading Desk – Europe

Last week was fairly sleepy for global equity markets as the US Thanksgiving holiday saw reduced market volumes and newsflow. The path of least resistance was a steady grind higher for the majority of markets. Headlines around the US-China trade talks still garnered attention, but it was quieter on that front. In Europe, politics were a focus, with the UK election campaign and leadership changes for German Chancellor Angela Merkel’s coalition partner garnering attention.

The Digest

UK Election Watch

With the December 12 UK general election fast approaching, we can expect plenty of headlines on UK politics in the coming days.

On Wednesday, an eagerly awaited YouGov multilevel regression and poststratification (MRP) poll suggested the Conservative Party was on course for a majority. A similar poll in 2017 had come close to predicting the vote share of that election and the results of this poll helped UK risk appetite.

It is worth noting, however, that the Labour Party appears to be edging closer to the Conservatives in polls. Some polls in the past week have shown the gap tightening to only around seven percentage points.

The common perception is that once the lead falls below seven percentage points, there’s a risk of another hung parliament. Still, the average lead is at 11 points, and many commentators continue to predict a Conservative majority. There remain a number of factors that could influence the final result. Some of those will come to light in the coming days.

The UK press will pronounce on its preferred candidates. As most UK newspapers take to take a right-leaning outlook, we believe this is likely to go in the Conservatives’ favour.

Over the weekend, the campaign has focused on security following Friday’s terror attack in London. This narrative could also impact polls.

US President Donald Trump is due in London for a NATO summit this week. Several reports have suggested UK Prime Minister and Conservative leader Boris Johnson is keen to avoid Trump getting involved in the UK election campaign.

A majority for the Conservatives would likely be the most market-friendly result, and with the polls pointing towards this, we have seen UK domestic stocks outperform. The pound also moved higher against the US dollar the week.

Angela Merkel’s Governing Coalition in Focus

In a break from UK politics, there were some interesting political developments in Germany over the weekend. Angela Merkel’s coalition partner, The Social Democratic Party (SPD), announced its new leaders: Saskia Esken and Norbert Walter-Borjans.

This is a significant development because the pair are more left-leaning figures who have previously been critical of the coalition arrangement.

Some commentators believe there is now a greater chance of the SPD walking away from its coalition with Merkel’s Christian Democratic Union (CDU). Such a move could potentially spark fresh elections, and the result would be uncertain given current polling.

An alternative to elections would be for the coalition to continue, but with the CDU making concessions to the SPD. This possibility could include bringing forward fiscal stimulus, which would likely be positive for markets.

Last Week

Europe

European markets were mostly higher last week as hopes over trade progress boosted investors’ appetite for risk assets, and economic data looked a little better.

European equities are now on track to have their best year in a decade, with all sectors in positive territory.

Spain’s equity market outperformed its European peers last week, while Italy lagged and finished the week flat. Sentiment in Spain improved after the Socialist party opened talks with Catalonia’s ERC in order to try securing enough parliamentary support to form a stable government.

Macroeconomic data from the euro area showed a continuation of recent improvement. Economic confidence rose and flash consumer price index (CPI) figures grew faster than expected.

Investors have been increasingly concerned about the economic picture in Germany. We saw some respite there too as Ifo Business Climate Index data and Gfk consumer confidence both edged higher, suggesting that there has been an improvement in sentiment.

There was also some disappointing data, as German retail sales fell in October; however, this metric is likely to be distorted somewhat as consumers bear in mind the upcoming holiday season and the increasing popularity of “Black Friday ” (on November 29 this year) to kick it off.

As sentiment around trade and macro data has improved somewhat, European companies have been on the lookout for opportunities (both domestically and overseas) clocking up some US$58 billion in merger and acquisition activity in November amid number of high-profile takeovers. Altogether, the amount of purchases by European companies is more than triple what we saw last November, and represents the busiest November since 2015.

Americas

US equities were steady last week, with the three major stock market indices all hitting new all-time highs.

It was a holiday-shortened week as equity markets were closed on Thursday for Thanksgiving and saw an early close on Friday. Market volumes were naturally light as a result, down 20% on the week.

Oil prices sold off on Friday going into month-end on the back of reports that Russia’s current overproduction, relative to the agreed ceiling, is likely to continue. This news led energy stocks lower on Friday, leaving energy the only sector to close the week in the red.

Consumer discretionary stocks outperformed, thanks in part to the traditional Black Friday sales.

The US Federal Reserve released its Beige Book report on Wednesday, with no major surprises. The tone around economic growth was upgraded from “slight-to-modest” to “modest”.

The release noted that the outlook “generally remained positive”. Most districts saw “stable-to-moderately growing consumer spending and increases in auto sales”. In terms of manufacturing, the Beige Book noted most districts “continue to experience no growth”. There was little market reaction on the back of the release, with US equities stable around all-time highs on Wednesday.

In terms of other economic data, home sales surprised to the upside in October, seeing a strong upward revision. November consumer confidence did miss estimates, however. Core capital goods orders and shipments came in stronger than expected, while third-quarter gross domestic product (GDP) growth was unexpectedly revised higher. Nonetheless, core Personal Consumption Expenditures inflation data does remain soft.

Asia   

It was another mixed week for indices in the Asia-Pacific (APAC) region.

Australian equities were the standout performers on the back of a number of positive earnings releases and some dovish commentary from the Reserve Bank of Australia, which fueled hopes for additional monetary easing.

Stocks in Japan also made gains after the Bank of Japan’s Haruhiko Kuroda said that the central bank would continue with powerful monetary policy to pursuit its 2% inflation target.

Both Hong Kong and mainland Chinese markets closed the week lower, with plenty of trade headlines to focus on. The initial hope following the Hong Kong elections and calming of protests faded on Tuesday as Hong Kong Chief Executive Carrie Lam offered nothing new, despite the success of pro-democracy candidates.

On trade, there was positivity early in the week after China said it would raise penalties on violations of intellectual property rights in an attempt to address a key sticking point in trade talks with the United States. On Wednesday there was another boost to sentiment as Trump said negotiators were “in the final throes of a very important deal”. This came after negotiators from both sides spoke via phone and helped global equities find support.

Concerns were raised later in the week, however, after Trump signed legislation expressing US support for the protestors in Hong Kong. The bill requires annual reviews of Hong Kong’s special trade status as well as sanctioning human rights abuses or any effort to undermine Hong Kong’s autonomy.

This legislation clearly didn’t go down so well in Beijing, and China’s Foreign Ministry reiterated a threat of retaliation against the United States in the form of countermeasures. This prompted equities in the region to drift lower into the weekend.

Week Ahead

Focus this week will be on UK elections, where opinion polls will likely drive sentiment for UK assets. German politics is likely to be in the foreground at the start of the week as investors adjust to the new SPD leadership.

Economic Data

• In Europe: Eurozone and UK services and composite purchasing manager index (PMI) data on Wednesday; and eurozone GDP and retail sales and German factory orders on Thursday.
• In the US: Services and composite PMIs on Wednesday; initial jobless claims, trade balance, factory orders and durable goods orders on Thursday; the monthly employment report as well as wholesale inventories on Friday.
• In APAC: Chinese and Japanese services and composite PMIs on Wednesday.

Politics

• NATO Summit in London from Monday to Wednesday.
• OPEC+ meeting Vienna on Thursday and Friday.
• Televised UK election debate on Friday.

Monetary Policy

• ECB President Christine Lagarde will testify at the European Parliament.

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1. A basis point is a unit of measurement. One basis point is equal to 0.01%.