Asian shares, pound surge as US-China deal, Brexit give clarity

Asian shares scaled eight-month peaks on Friday as a last-gasp trade deal between the United States and China, as well as a likely major election win by Britain’s Conservative Party, looked to have cleared a couple of dark clouds from the global horizon.

The double dose of relief boosted the Chinese yuan but slugged safe-haven sovereign bonds and the Japanese yen, even leading investors to scale back the chance of more interest rate cuts around the world.

“Global investors have been given two of the biggest gifts on their Christmas list and should be appreciative for a while at least,” said Sean Callow, a senior forex analyst at Westpac.

“Global equity indices such as MSCI World should set more record highs and sterling could push above $1.36.”

The pound hit its highest since mid-2018 as United Kingdom exit polls seemed to rule out a shock win by the left-wing Labour opposition, and could help clarify the outlook for Brexit.

Prime Minister Boris Johnson gained a landslide victory in Britain’s Parliament on Friday with a total 364 out of 650 seats, settling another long-standing uncertainty.

A wave of trade euphoria had already lifted Wall Street to record highs overnight. Reuters reported the US has agreed to reduce some tariffs on Chinese goods and delay a tranche of tariffs as part of a phase one deal.

China also has agreed to make $50bn in agricultural purchases in 2020 as part of the deal, that person and another US source familiar with the talks said.

Beijing’s silence, however, fuelled questions over whether the two sides can come to a truce in their bitter trade war before a new round of tit-for-tat tariffs takes effect on Sunday.

Less need for more cuts?

In Asia, Japan’s Nikkei climbed 2.1 percent to a 14-month high, while South Korean stocks firmed 1.2 percent. E-Mini futures for the S&P 500 rose 0.4 percent to another peak.

MSCI’s broadest index of Asia-Pacific shares outside Japan put on 0.5 percent.

Wall Street had celebrated the trade news with record highs. The Dow ended Thursday up 0.79 percent, while the S&P 500 gained 0.86 percent and the Nasdaq 0.73 percent.

“If the US cuts the current tariffs to some extent as reported, that is not something markets have priced in, so we could see a further leg up in the stock market,” said Norihiro Fujito, chief investment strategist at Mitsubishi UFJ Morgan Stanley Securities in Tokyo.

“The Conservatives appear to be on course for a big win. We are now finally seeing a clear direction on Brexit after three years of deadlock.”

But the rally in stocks was bad news for bonds and yields as US 10-year Treasuries shot up to 1.95 percent, a rise of 16 basis points in just two sessions.

Interest rate futures slipped as investors priced in less chance of a rate cut from the US Federal Reserve next year – a shift seen across a range of developed nations.

Other safe harbours also took a beating, with the yen sliding across the board. The US dollar firmed further to 109.42 yen, having risen 0.7 percent overnight.

The US dollar fared less well elsewhere as the pound and the euro benefited from the UK exit polls. The euro added 0.5 percent to $1.1189, while the dollar dipped 0.35 percent on a basket of currencies to 96.742.

The US dollar also lost out to the Chinese yuan to hit an 18-week low as any truce would be seen as a boon for the export-heavy economy. The dollar was last at 6.9487 yuan having shed a steep 1.2 percent overnight.

The shift from safe havens saw spot gold ease to $1,465.04 per ounce.

Oil prices rallied on hopes a trade deal would support global growth and thus demand.

US crude added 36 cents to $59.54 a barrel, while Brent futures climbed 0.8 percent to their highest in three months at $64.68.