Despite a catalogue of developing geopolitical risks, the equity markets on Thursday posted record all-time highs. The three main US indices, the Dow Jones Industrial Average, the S&P500 and Nasdaq all printed at new levels as bulls took control. Traders are taking the view that the Middle East risks are present, but known, and are instead basing their optimism on economic fundamentals.
Item number one on the bull's wish-list for 2020 is the signing of ‘phase one' of a trade agreement between the US and China. Thursday saw the China negotiating team confirm they will be accepting the invite from the US to attend a signing ceremony in Washington D.C.
A significant first step was taken on Wednesday morning when Ursula von der Leyen visited Downing Street in London to take part in the first face-to-face EU–UK trade deal meeting between her and Boris Johnson. Von der Leyen, the President of the European Commission, took up her powerful position in December, the same month that Johnson was elected Prime Minister of the UK with a governing majority of a size that hasn’t been seen for many years. The relatively strong position of both leaders and the dynamics of their relationship might offer hope to the financial markets. The task they face is thrashing out a trade agreement that is fit for purpose and to do so before 31st December 2020. Failure to complete the task before the deadline would lead the UK and EU to revert to standard and unappealing World Trading Organisation (WTO) trade terms.
In the last week, US and Iranian military forces have both taken a free hit against each other. Each has suffered collateral damage, each as carried out a show of strength. The suggestion being made is that both sides can now argue they have achieved a face-saving ‘victory’ over the other. This view is being shared by many in the equity markets as global indices have rallied back to be near the levels they were at before the first shorts were fired.
The US missile attack that killed Iranian general Qasem Soleimani caused oil prices to spike (Brent gained 4% intraday and closed 3.55% up) and the S&P500 to fall 0.71%. Swift Iranian retaliation, which followed on Wednesday 8th January doubled up the pressure. Oil rose again and the S&P500 fell a further 0.28%. Those who had put on positions in anticipation of the situation blowing over were disappointed and prices picked up momentum as they pushed through the stop losses of those looking for immediate retracement.