Shares on both sides of the Atlantic have taken off in recent days as political risks have faded away at the end of a remarkable year of renewed investor optimism.
Global stocks hit a new record high on Monday, principally thanks to the apparent, if partial, resolution of the long-running trade war between the US and China. Meanwhile, UK stocks bounced back into fashion this week after the Conservatives won an unexpectedly large victory in the third general election in less than five years.
Important as the election seems here, to investors around the world it played second fiddle over the weekend to news that China and the US have agreed a ‘phase one’ deal to defuse tensions between the world’s two biggest economies.
The White House confirmed that it will cut tariffs on $120bn of Chinese imports from 15% to 7.5%. These were implemented in September. Another tranche of tariffs, due to come into force on Sunday, were also scrapped.
In return China has agreed to purchase American agricultural goods, although it is not clear if Beijing has met Washington’s demands that it spend $50bn a year on US farm goods. It is also unclear whether there have been any concessions from China on its economic model - industrial subsidies, cybertheft and a reliance on state-owned enterprises - all of which the US has been pushing for throughout the past two years of rising tensions.
Concerns about an escalating trade war have been one of the darkest clouds over global stock markets over the past couple of years, offsetting the positives of robust job creation and falling interest rates. With an election looming at the end of 2020, President Trump is keen to neutralise trade as a threat to his re-election chances.
The S&P 500 closed on Monday night at 3,191, up 23% over one year and even more year to date. Its gain of close to 30% since January means the US market is on course for its best year since 2013 and its second best since the financial crisis.
Back in the UK, having been out of favour ever since the EU referendum in 2016, domestic shares rose sharply on Friday and again yesterday as investors focused on the mismatch between one of the world’s least loved markets and the overnight elimination of much of Britain’s political risk.
UK politics has been in the grip of political deadlock for more than three years now so the massive swing to the Tories, delivering an 80-seat majority, promises the unfamiliar situation in which a government can actually deliver on its agenda.
Specifically, this means the Government can move at pace to deliver Brexit by the end of January as promised and start to focus on the negotiation of a trade deal with Europe by the end of 2020.
Having been supported by many former Labour voters in a radical reshaping of the political landscape, the Conservatives will also move quickly to shift priorities to the public spending on infrastructure, health, education and security that its socially conservative but formerly left-leaning supporters will now demand.
That fiscal boost should help the UK’s stagnant economy with a knock-on benefit to the smaller, home-grown companies in the FTSE 250, which rose by 3.5% on Friday, outpacing the more international FTSE 100.
But the good news for markets is not limited to faster overall growth. It also reflects relief that a humbled Labour party will not now get to push through its far-left agenda of nationalisation and punitive tax hikes on the wealthiest 5% of households and the country’s biggest companies.
Labour’s plans had included a hike in corporate tax to 26% and the creation of a new 50% income tax band, kicking in at a lower level than the current 45% rate. Other investor-unfriendly measures included an alignment of capital gains tax with income tax - currently investment gains are taxed much more lightly than income. It also had plans to expropriate 10% of the shares of larger companies, handing some of the proceeds to employees but keeping the lion’s share for the Treasury.
It was all a step too far for an electorate which also harboured deep-seated reservations about the character of Labour’s leader Jeremy Corbyn. His failure to resonate with areas of the country in the midlands and north which had been staunch Labour supporters for decades effectively killed off any hopes Labour might have had of leading a coalition government let alone forming a majority. He is standing down, prompting a leadership election in the first quarter of next year.
Investor relief was also reflected in the pound which rose as high as $1.35 as it became clear that a Conservative victory was in the bag. Sterling also rose against the Euro, pushing above â‚¬1.20 to the pound.
Both the pound and UK shares would probably have risen even further were it not for a residual fear that 2020 may still bring its share of political uncertainty. That’s because the next phase of the Brexit process could prove even more challenging than the initial divorce negotiation. Boris Johnson has vowed to put in place a new trade agreement with Europe by the end of 2020, saying he would not take advantage of a proposed extension of the negotiating period to the end of 2022.
The size of his majority, and the freedom that brings from the Eurosceptic right wing of his party, may allow him to row back on that promise with a view to tacking back to the centre ground to negotiate a closer alignment with European regulations than he had previously contemplated. However, there is no sign of this U-turn yet. It all remains up in the air and 2020 promises to be another gripping year of political intrigue.
Crossing the Atlantic again, New York may have been focused on the market implications of a trade deal but down in Washington attention was on the latest twists and turns of the Democratic bid to impeach the President.
The stage is now set for Donald Trump to become only the third President ever to face impeachment. The judiciary committee voted yesterday in favour of articles of impeachment, charging the President with abusing his power and obstructing Congress. The full House of Representatives will vote on the charges this week and only a majority is required to take the process to a full trial of the President in the Senate.
Were it to go this far, however, the chance of Mr Trump being removed from office remains vanishingly small because a two thirds majority of the Senate is required to convict him. In a Republican-majority Senate that is inconceivable.
On this side of the Atlantic the big economic events this week include a string of pre-Christmas data releases. We get updates on wage growth and unemployment, inflation and then on Thursday the last Bank of England rate-setting decision of 2019.
This meeting will be pretty much the swan song for Mark Carney, governor of the Bank of England, who steps down at the end of January. His replacement is expected to be announced in the next few days, with front-runners including Minouche Shafik, a former deputy governor of the Bank, Andrew Bailey, currently head of the FCA and Kevin Warsh, a top Federal Reserve official.