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The markets' reaction to the election result and trade news

13 December 2019

We have woken up this morning to not only a substantial Conservative majority in Parliament, but also reports of President Trump signing off the first phase of a trade deal with China. The legal text of the China-US deal is not yet available, so we do not yet know the extent of this. Yesterday, the Daily Telegraph had an opinion poll that showed the Conservatives with a lead of only 5%. The size of the win is more than almost anyone predicted, the result has boosted the pound and news of the trade deal has supported equity markets globally. Boris Johnson can now push ahead with his trade negotiations knowing that he has backing in Parliament. The size of his majority means that he may also be able to see off the more extreme elements of his own party and we may see Jacob Rees-Mogg out of the Cabinet. Historically he has been more of a one nation Tory and he now has the opportunity to get back to a more moderate view of the world. The next election may be five years away, Brexit will not be an issue and the Labour and the Liberal Democrat parties will have new leaders.

 Market reaction

As at 11.00 AM this morning the pound was up about 2% against the dollar following the exit poll prediction of a large Tory majority, and is up 11% from the year's low in August. Globally equity markets have taken a boost from the reports of a phase one trade deal and from here on it will be all about trade. The FTSE is up 1.9% whilst the Nikkei index in Japan closed up 2.5% today. As global equity markets moved higher bond yields have increased.

Within the UK market, the dispersion of returns this morning is substantial with domestic stocks and those subject to the threat of nationalisation from Labour outperforming international stocks. National Grid opened 8% up and house builder Persimmon up 14% with Glaxo Smith Kline down 4%. These dramatic moves have already moderated somewhat; Glaxo Smith Kline is now only down 0.6% and the more domestically focused FTSE 250 mid cap index is up 4.3%.[i]

Where next?

Moving forward it is all about international trade, with particular focus on US policy in relation to China. For the UK, I would caution that the trade deal with the EU may be hard to come by in time for the year-end deadline. One of the first manifesto commitments to be missed may be the promise not to extend the transition period. President Trump has tweeted his congratulations to Boris Johnson saying that they could do a "massive new trade deal after Brexit". The US has a $4.5 billion trade surplus with the UK and a $170 billion deficit with the EU as a whole, making it easier for Trump to agree.  However, a UK-US trade deal may be dependent on the right deal with the EU.  As we move to more brinkmanship on UK-EU trade, it is possible that the pound strength may fade.

We are likely get more details on the China-US trade and the extent of this will be a focus for international investors.  It may still be many months or even years before the UK relationship with the EU is finally agreed. I therefore caution on chasing the moves we have seen today.

[i] https://www.bloomberg.com/europe

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This communication is provided for information purposes only. The information presented herein provides a general update on market conditions and is not intended and should not be construed as an offer, invitation, solicitation or recommendation to buy or sell any specific investment or participate in any investment (or other) strategy. The subject of the communication is not a regulated investment. Past performance is not an indication of future performance and the value of investments and the income derived from them may fluctuate and you may not receive back the amount you originally invest. Although this document has been prepared on the basis of information we believe to be reliable, LGT Vestra LLP gives no representation or warranty in relation to the accuracy or completeness of the information presented herein. The information presented herein does not provide sufficient information on which to make an informed investment decision. No liability is accepted whatsoever by LGT Vestra LLP, employees and associated companies for any direct or consequential loss arising from this document.

LGT Vestra LLP is authorised and regulated by the Financial Conduct Authority (FCA).