LCG MARKET WRAP: No Brextension law, Boeing, Unilever & oil

17 december 2019

INDICES: Trade war optimism fades

Shares in Europe have opened in the red on Tuesday. Some of the optimism over the US-China trade deal has started to fade and the possibility the UK may exit the EU next year without a deal has reared its ugly head again. Stocks on Wall Street look set for a softer open, taking a pause from the record highs made yesterday. In Asia, ongoing optimism about the US-China trade deal carried Japan’s Nikkei index to its highest in a year. We are looking at this as a merely a lull after the strong gains brought on by the trade agreement.

EQUITIES: Boeing, Unilever

Shares of Boeing have dropped after news it will halt production of its 737-MAX airliner. Boeing were too optimistic about the return to service of the 737. The delay damages the prospects for future sales and is more evidence Boeing can’t simply brush the two accidents involving the planes under the carpet. The longer the 737 is out of service, the more investors appreciate that the problem is not a flash in the pan. We’re looking for BO shares to make 52-week lows next year as a result.

A warning from Unilever that it will miss full-year sales targets has seen shares slip quicker than a Dove soap. The shares have slipped from a 1-month high after the election result to the lowest since April. Unilever is a globally-diversified firm so sales will be hurt when global growth conditions weaken. But weaker markets are not the only issue. If Unilever were performing as in days gone by, investors would be attracted to the defensiveness of it is consumer products when global conditions are more iffy. Instead, there is a feeling that Unilever has not convinced its consumers about its green credentials. In our view, mass-produced, over-priced branded products wrapped in plastic is not where consumer demand is headed.

FOREX: No Brextention in law hits GBP

The British pound has now unwound a large chunk of its election day days gains. Some of the concern surrounds the possibility of a No Deal exit at the end of 2020 when the transition period ends. There have been reports that the new Withdrawal Agreement bill will prohibit the government from agreeing to any extension. Currency traders don’t know how to square the circle of a comprehensive EU-UK free trade deal and an end of 2020 deadline to complete it.

Prime Minister Boris Johnson had already said during the campaign that he would not extend the transition period. There was a line of thinking that his huge majority in parliament would allow Boris to get away with reneging on his promise not to extend. That idea now needs to be scrapped. We are now waiting for the other shoe to drop – that Boris will not pursue a softer Brexit just because he has a large majority and some new MPs from constituencies with manufacturing jobs. That being said, we remain positive on Sterling. The Withdrawal agreement finally getting passed in parliament, possibly this Friday should help the pound get its mojo back.

COMMODITIES: Oil near 3-month highs

Some better economic data from China has given traders some hope that oil demand will hold up during the next stage of trade negotiations between the US and China. Oil prices are now up near 3-month highs and the highest since the attack on Saudi oil facilities in September. We think once phase two negotiations get under way, Brent can push back toward $70 per barrel.

Gold prices continue to hover beneath $1480 per oz. We’re looking at the gold in yen reaching a 5-week high at 16,2000 as a clue that the direction for gold in dollars could be to the upside.