SANTA RALLY CAME EARLY - ALL EYES NOW ON UK ELECTION

Market Report: November 2019

by Imran Lakha 

At the end of last month we had flagged that the pain trade in equities looked to be higher due to much of the fundamental bad news this year being priced in and investor positioning being too defensive going into year-end.  Sure enough, we saw an impressive 3-4% rally across the broad US and European stock markets over the course of November.  With many investors now hoping for a Santa rally, I feel like a sideways market is the most likely outcome for the rest of 2019.  The US-China trade talks look to have hit a stumbling block with Trump backing pro-democracy Hong Kong protestors, this may temper some of the market bullishness we have seen recently.  Whilst on the other hand the market is not pricing in much additional accommodation from the FED next year which would give them more bullets to support any market weakness should it arise.  I think the combination of these factors, along with most eyes being on the outcome of the UK election, will mean a pretty muted reaction from most major equity markets in December.

Speaking of the UK Election, the GBPUSD price action has been suggesting that the market is confident the Conservatives will gain a majority and be able to pass the Brexit deal early next year.  From a trading perspective, I feel that a tactical short position in GBPUSD would make sense in the weeks leading up to the election incase the polls start to swing back towards a more even outcome.  Any short position should be closed out before the actual election as it is very likely the Pound will gap violently after the event. Outside of the UK, the EURUSD has been drifting back down towards 1.10 after a brief pop last month as the dollar regains it footing.  We would expect this to continue given the respective central bank policy stances right now.

After a short sharp wash out earlier in the month, bond markets seem to have stabilised and with very little evidence of sustainable inflation we think the rally in bonds is likely to resume.  Precious metals have had a tough month with Gold down 3% testing support around 1440/1450 and Silver retracing as much at 6%.  We still like these assets longer term outlook and would look to continue scaling into long positions on continued weakness.  We feel that central banks have no way out from the monetary debasing that they have embarked on and the only sensible conclusion to that is much higher precious metal prices over the long term.


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