Stocks Wait For ECB Signals, Pound Strong After Brexit Drama

Santa delivered his traditional end of year rally on Thursday as world stocks made a third day of gains and the pound and the euro both stayed strong after the latest bout of Brexit drama.

UK Prime Minister Theresa May’s survival in a late night no-confidence vote has not changed the markets’ views on Brexit but along with signs of a tentative truce in the U.S.-China trade war and progress in Italy it was enough to keep them jolly.

The Nikkei and other Asian stocks had pushed roughly 1 percent higher and Europe also made a steady start [.EU] ahead of several central bank meetings including a landmark one for the ECB which was set to end its quantitative easing program.

The euro rose 0.2 percent to $1.1394 having largely traded in a $1.16 and $1.12 range since August. That made the dollar a touch softer while the pound was up for a second day at $1.2670. [/FRX]

“All eyes will be on the ECB,” said Morgan Stanley FX strategist Hans Redeker. “It may revise its growth projections lower but continue to prepare the markets for allowing QE to end.”

Short-dated Italian bond yields – which move inversely to price – hit their lowest in six months after the country’s government confirmed it would cut its deficit goal for 2019, potentially ending months of wrangling with Brussels.

Italian Prime Minister Giuseppe Conte said the deficit goal had been lowered to 2.04 percent of gross domestic product from the 2.4 percent it had originally proposed, and it expected the European Commission to accept the proposal.

Two-year Italian bond yields tumbled to 0.51 percent which took them back to where they were before a late May eruption of tensions triggered the worst day for short-term Italian debt in 25 years. [GVD/EUR]

Italy’s five-year and 10-year government bond yields dropped to their lowest level in 2 1/2 months and the closely watched Italy/Germany 10-year bond yield spread improved to its tightest since the start of October.

“I think the momentum can carry on in the near term as we have a number of supportive factors for Italian debt beyond just the hopes the budget deal can be reached,” said Commerzbank rates strategist Christoph Rieger.

On Brexit UK Prime Minister May was heading to an EU summit in Brussels following her confidence vote win to try and get some additional concessions on the controversial Irish border aspect of the agreement to placate rebels within her own party and Ulster unionist allies.

Markets reckon May’s continued premiership for now makes a ‘no deal’ Brexit less likely at the margins and her survival takes at least some of the immediate headline risk out of the market – even if the Brexit impasse is really no clearer.

The pound was trading at $1.2670 in early London dealing, still well up more than cent from the 20-month lows set early Wednesday and at about the levels seen just before the vote results on Wednesday night.

FULL OF BEANS

In Asia, gains were concentrated in Chinese shares, with Chinese blue-chips up 1.5 percent and Hong Kong’s Hang Seng index gaining 1.1 percent.

Japan’s Nikkei stock index ended 1 percent higher, while Australian shares gained 0.1 percent.

Markets are slowly growing less pessimistic about the chances of a Sino-U.S. trade deal after a slew of news this week pointed to easing tensions between the two powers.

Reuters reported on Wednesday that Chinese state-owned companies have bought more than 1.5 million tonnes of U.S. soybeans in the first major U.S. soybean purchases in more than six months.

The purchases are the most concrete evidence yet that China is making good on pledges made when Presidents Donald Trump and Xi Jinping met on Dec. 1 and agreed to a 90-day detente to negotiate a trade deal.

But markets have been stung by false dawns in the past.

Yoshinori Shigemi, a global market strategist at JPMorgan Asset Management, cautioned against reading too much into trade headlines.

“U.S.-China trade negotiations are subject to very high uncertainty. So lots of headlines come and go, and markets come and go also,” he said. “We have to see the evolution of this negotiation.”

In the commodities markets, oil prices steadied, under pressure from high inventories but buoyed by a drawdown in U.S. crude stockpiles and the indications that the U.S.-China trade war may be easing.

Copper, which is highly sensitive to China’s fortunes also rose to a one week high in the metals market at it approached $6,200 a tonne although it remains badly beaten having lost almost 15 percent this year.

“Signs of positive progression in trade talks between the U.S. and China should see sentiment in the commodity market remain positive,” analysts at ANZ wrote in a note.

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