Brexmas election vote, equities tentative start, HSBC down on miss

Morning Note

There an awful lot of questions for traders that should be answered in the coming days. First and foremost: is Britain leaving the EU on Thursday? A vote on the government’s call to hold an election on Dec 12th takes place today. Requiring a two-thirds majority under the Fixed Term Parliament Act, it’s unlikely to succeed. The SNP-Lib Dem vote on Tuesday, calling an election for Dec 9th, has much greater chance of success as it only requires a simple majority. Amid all this we need to know if the EU will offer an extension, and for how long. The timing of the election is important as it has a material impact on whether the government can get its Brexit withdrawal agreement bill through Parliament before MPs break up for the election. The length of the delay will affect whether there can be an election or not. If there is no appetite for delay Brexit for long enough to allow an election, and/or MPs don’t back an election at some point, we could be heading for no deal by accident.

It feels as though we will see no deal risks elevated again – it’s still the default position – which would weigh on sterling. Short bets on sterling are being dumped with the latest speculative positioning data showing net shorts declined to 52.4k from 73.0k in the preceding week. The market seems to have discounted no deal now, so any threat to that consensus could quickly open up a lot of downside.

GBPUSD was firmer in early trading in London, pushing up to a whisker away from 1.2860 before paring gains back to the 1.2850 area. EURUSD was also a tad firmer, pushing up back to the 1.110 level lost last week.

Equities got off to a tentative start in Europe. The FTSE, CAC and Euro Stoxx 50 all slipped, while the DAX got a boost from better trade vibes to rally through 12,900. The FTSE 100 was weighed down by heavyweight HSBC, which slipped 3.5%. Asia was firmer as investors digested more positive sound bites on trade. It seems the US and China are close to finalising parts of interim trade deal. The mood music is sounding better on trade for sure, but disappointment is only ever a presidential tweet away. US stocks are close to record highs once more but the bulls failed to push the S&P 500 over the line on Friday. 

This is going to be a massive week for equity markets, with and slew of important macro data, earnings and the Fed in focus. The key question that we think will need to be answered is whether the Fed believes there may be another hike in December. Given the uncertainties over trade it seems likely the Fed and Jay Powell will leave the door open for another cut this year after this week’s expected cut.  

Since the last meeting the near-term risks of a blow out from the trade war have subsided with the ‘phase one’ deal, whilst no-deal Brexit risks are also greatly reduced. This offers the Fed time to pause its cutting cycle at 3 should it choose to – therefore it’s possible it will just drop a few hints that there will no Dec cut. The yield curve is also looking a lot healthier. Broadly, the economy appears still in decent shape, albeit there are heightened fears that manufacturing is slumping. Inflation is not running too hot by any means. 

Gold has eased off its highs hit last week as it continues to prefer to stick to the ranges. Bitcoin has gone on a rollercoaster that’s brought back memories of the worst of the hype phase. After last week’s plunge futures based on the 7350 support zone and flew higher on Friday before gapping up again on the Sunday open to touch $10k again. At last look prices were around $9500, a full $2k up from Friday morning.

Equities

HSBC profits fell by a quarter because of weakness in Britain, Europe and the US. Asia held up ok. HSBC has well-documented exposure to emerging, especially Asian, economies, but it’s developed markets that are the problem. Profit before tax in Asia was up 4% with Hong Kong proving remarkably resilient.

Profits overall slipped 24% to a shade off £3bn, well below expectations. Return on tangible equity was down to 6.4% vs 9.5% expected. That’s left management having to abandon its goal of achieving 11% next year.

All this leads to interim boss Noel Quinn to speed up plans to ‘remodel’ the business, for which read major cost-cutting and retrenchments. Remember Mr Quinn wants the job full time – he’s going to be aggressive with this. Shares slipped more 3% in early trade.