Stock markets and sterling gained on Friday as U.S.-China trade hopes and an election win for Britain’s Brexit-backing Conservative Party cleared two of the clouds on the global investment horizon.
The 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 Sean Callow, a senior forex analyst at Westpac. “Global equity indices such as MSCI World should set more record highs and sterling could push above $1.36.”
The pound had climbed overnight to its highest since mid-2018 when exit polls and then a burst of UK election results ended any chance of a win by the left-wing Labour opposition, 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 are set to drag on for months, if not years.
The pound had started to see some profit-taking but was still up over 2.4% in 24 hours at just under $1.34 having also reached its highest against the euro since mid-2016.
Shares in British companies with high UK revenues surged as soon as they opened. The mid-cap stocks index FTSE 250, which is home to many of them, shot to a record high. The country’s biggest banks rose 5% to 15%.
“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,” explained NatWest Markets head of G10 FX strategy Paul Robson, saying heavyweight sovereign wealth funds could start buying into UK equities.
Trade euphoria had 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 U.S. source familiar with the talks said. Beijing had remained tight- lipped, however.
“If the U.S. 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 Norihiro Fujito, chief investment strategist at Mitsubishi UFJ Morgan Stanley Securities in Tokyo.
E-Mini futures for the S&P 500 rose 0.3% to another peak. On Thursday, the Dow closed up 0.8%, the S&P 500 gained 0.86% and the Nasdaq rose 0.73%.
Europe’s pan-regional STOXX 600 was 1.5% higher, helped by the FTSE’s 1.7% gain. That seemed puny compared with the 4% leap in the domestic-focused FTSE 250.
“This morning we have gently added to our UK domestic stocks,” said James Clunie at asset manager Jupiter’s Absolute Return Fund.
In Asia, Japan’s Nikkei climbed 2.5% to a 14-month top and Shanghai blue chips advanced 2%. MSCI’s broadest index of world shares jumped 0.7% to set its second straight all-time high.
That was bad news for bonds, and yields on U.S. 10-year Treasuries shot up as far as 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 -0.247%.
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 109.65 yen having risen 0.7% overnight.
The U.S. currency 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 also fell to an 18-week low against China’s yuan, since any trade truce would be seen as a boon for the export-heavy Chinese economy. It recovered to 6.9673 yuan in Europe, having shed 1.2% overnight.
Spot gold was higher at $1,470 per ounce.
Oil prices rallied on hopes a trade deal would support global growth and thus demand. U.S. crude added 31 cents to $59.49 a barrel. Brent crude rose 42 cents to $64.62.