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Weekly comment: 09.12.19

Market overview: Alan McIntosh, Chief Investment Strategist

As we move into the final furlong of the UK general election race markets have all but made up their mind – or at least the currency market has. The pound has moved gradually higher on the expectation of a Conservative majority. This is by no means a certainty however. Previous opinion polls did not predict Donald Trump, the vote to leave the EU, or the Conservatives losing their majority at the last general election.

If the Tories do get a majority, the pound will likely nudge a little higher, but there are huge uncertainties surrounding the shape of the UK’s future trading relationship with the EU, as well as the timing of achieving it. The next stage of the negotiation will likely temper any premature enthusiasms about “getting Brexit done.”

Friday’s US employment data bolstered the American stock market after a few weeks of softness. With unemployment at a 50 year low and wages growing above the rate of inflation, it should hardly come as a surprise that consumer confidence has risen to a seven month high. Despite the on-off nature of trade talks with China, consumption represents 70% of US GDP and a strong consumer is vital to the future health of the economy. Having said that, further tariffs are due to be imposed on Chinese exports to the US on Sunday. Markets will not react favourably should that happen.

Economic overview: Richard Carter, Head of Fixed Interest

We have finally reached election week after what has been a fairly unedifying campaign and the opinion polls continue to point to a Tory majority of around 30-50 seats. Currency markets have largely priced in a Johnson victory but we may see sterling rise towards $1.35 if that is confirmed in the early hours of Friday morning. Gilt yields would probably also rise but not by much as there seems little prospect of the Bank of England raising rates any time soon.

Elsewhere, the economic news last week was very encouraging. US non-farm payrolls surged by 266,000 in November, wages rose by 3.1% on the year and consumer confidence improved. This dispelled some of the fears about an impending slowdown although the outlook for 2020 may largely depend on the outcome of US/China trade talks. The next round of tariffs is due to be imposed on December 15 but will hopefully be postponed or cancelled.

The US Federal Reserve meets this week and is likely to keep interest rates unchanged for the next few months at least. Christine Lagarde also has her first ECB meeting as President, although it is too early to expect any radical change in policy from that of Mario Draghi.

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