Global Markets: Shares and sterling soar as trade and Brexit fog lifts

LONDON/SYDNEY (Reuters): Stocks rose and the pound gained on Friday as the prospect of a China-US trade deal and an election victory for Britain’s Brexit-backing Conservative Party cleared two of the darkest clouds on the global investment horizon.

The double dose of relief undercut safe-haven sovereign bonds and the Japanese yen and led markets to scale back expectations of more interest rates cuts around the world.

“Global investors have been given two of the biggest gifts on their Christmas list and should be appreciative for a while at least,” said Westpac senior forex analyst Sean Callow. “Global equity indices such as MSCI World should set more record highs and sterling could push above $1.36.”

The pound reached its highest since mid-2018 as exit polls and then UK election results wiped out any chance of a victory by the left-wing Labour opposition or a hung Parliament, which had been a worry for investors.

Prime Minster Boris Johnson won a commanding majority in Britain’s Parliament, giving him the power to deliver Brexit, though trade talks with the European Union were set to drag on for months yet.

The pound had started to see some profit-taking but was still up almost 2% at $1.3411. It reached its highest levels against the euro since mid-2016.

UK shares exposed to the domestic economy surged as soon as they opened. The mid-cap stocks index FTSE 250, which is home to many companies with high UK revenues, surged about 5% to record highs.

“Over the next 1-2 months I think it is about long-term buyers of sterling returning to the market that might have been on the sidelines up until this point,” said NatWest Markets head of G10 FX strategy Paul Robson. Sovereign wealth funds could now start buying UK equities again and foreign direct investment could pick back up, he said.

Trade optimism had already lifted Wall Street to record highs. Reuters reported the United States had proposed reducing some tariffs on Chinese goods and delaying a tranche of tariffs as part of phase one of a deal.

China would need to agree to make $50 billion in agricultural purchases in 2020, that person and another US source familiar with the talks said.

“If the US cuts the current tariffs to some extent as reported, that is not something markets have priced in, so we could see a further leg up,” said Tokyo’s Mitsubishi UFJ Morgan Stanley Securities chief investment strategist Norihiro Fujito.

Europe’s pan-regional STOXX 600 share market jumped 1.5% higher on the twin boosts. In Asia, Japan’s Nikkei climbed 2.5% to a 14-month top. Shanghai blue chips advanced 2%.

MSCI’s broadest index of Asia-Pacific shares outside Japan jumped 1.5% to its highest since late April.

E-Mini futures for the S&P 500 rose 0.4% to another peak. On Thursday, the Dow closed up 0.79%, the S&P 500 gained 0.86% and the NASDAQ rose 0.73%.

That was bad news for bonds, and yields on US 10-year Treasuries shot up to 1.91%, a rise of 12 basis points in just two sessions. Germany’s 10-year government bond yield touched a six-month high at 0.217%.

Interest rate futures slipped as investors priced in less chance of a rate cut by the Federal Reserve next year – a shift seen across a range of developed nations including the UK.

Other safe harbours also took a beating, with the yen sliding across the board. The dollar gained to 109.60 yen having risen 0.7% overnight.

The dollar fared less well elsewhere, slipping 0.5% to 96.792 against a basket of currencies, as the pound and the euro both benefited from the UK election result.

The dollar fell to an 18-week low against the yuan, since any trade truce would be seen as a boon for the export-heavy Chinese economy. It was at 6.9607 yuan having shed 1.2% overnight.

Spot gold was flat at $1,467.60 per ounce.