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Daily Briefing: Markets nearing record highs as year ends

LONDON (Reuters) - World stock markets are pushing all-time highs as the year ends, following at least partial resolutions to the two issues dominating investor sentiment all year – phase one of a U.S.-China trade deal is in the bag and a relatively smooth Brexit withdrawal next month looks likely after last week’s UK election.

FILE PHOTO: The German share price index DAX graph is pictured at the stock exchange in Frankfurt, December 13, 2019. REUTERS/Staff

Perhaps the most interesting aspect of the market reaction over the past two trading days is how modest it’s been, although sterling and UK stocks continue to outperform early on Monday.

Some of that restrained reaction is explained by just how much the positive scenarios were already priced in, but there’s still room for optimism as we enter the final full trading week of 2019.

U.S. trade representative Robert Lighthizer claimed on Sunday a deal that will nearly double U.S. exports to China over the next two years was "totally done" as the U.S. dropped Sunday’s planned tariffs on some $160 billion of Chinese imports and cut in half to 7.5% tariffs on another $120 billion of good previously taxed.

Some investors suggested the failure to fully roll back prior tariff increases was reason for caution, and Chinese officials said the wording of the final texts remained “delicate”, but the agreement went further than the tariff deferral many had expected and scotched fears that all deals were off until after next November’s U.S. election.

To add to the burst of optimism, Chinese industrial production and retail sales growth for November came in ahead of forecasts – the former hit a five-month high.

Wall Street’s S&P 500 eked out a record closing high on Friday and the ViX equity volatility gauge subsided to its lowest in two weeks, about 12.5%. U.S. stock futures were up again overnight. Ten-year U.S. Treasury yields slipped back by the close after setting one-month highs but have firmed up again first thing Monday, just shy of 1.84%.

Shanghai’s stocks closed up more than 0.5% on Monday, with offshore yuan up, although off Friday’s four-month high. The rest of Asia’s main markets were more subdued and Tokyo, Hong Kong and Seoul were all in the red. MSCI’s all-country world index nudged higher, although it was shy of Friday’s record highs for now.

The dollar remains weaker against both developed and emerging currencies, with sterling still the star performer after some profit-taking on Friday following its post-election surge.

The pound hit a high of $1.3516 after Thursday’s bigger-than-forecast election win for Prime Minister Boris Johnson’s Conservative Party, with attention now switching to how Johnson’s 80-seat majority will allow him to shape both the Jan. 31’s Brexit withdrawal and the trade negotiations that follow through the year.

Prime Minister Boris Johnson kisses a supporter's dog during a visit to see newly elected Conservative party MP for Sedgefield, Paul Howell, at Sedgefield Cricket Club in County Durham, December 14, 2019

Many investors assume the large majority leaves Johnson less vulnerable to the more extreme factions in his party and that his desire to push for a free-trade agreement as soon as possible will allow him to make concessions that reduce the friction for British businesses.

How Johnson shapes his new cabinet, where a third of positions are expected to be changed, may be a key signal in that regard. Investors will also be looking out for the first signs of how business sentiment has responded to the election result.

Sterling was rising again first thing Monday, testing $1.34 in early dealings and with euro/sterling lower again toward 0.83. Flash December PMI business surveys from around the world are due Monday and will be watched closely, although the UK surveys will have been conducted before the election.

Turkey’s lira was the outlier in emerging markets – dropping as much 0.7% in early trade and on course for its worst day in two months. President Tayyip Erdogan warned that Turkey could shut down its Incirlik air base, which hosts U.S. nuclear warheads, in response to threats of U.S. sanctions and a  U.S. Senate resolution that recognised the mass killings of Armenians a century ago as genocide.

In European corporate news, Sweden’s Electrolux is seen falling after a profit warning. Hexagon could be under pressure after its CEO sold more than half his stake for "private financial reasons". 

Daimler's main China joint-venture partner, BAIC Group, wants to double its stake and win a board seat in the German luxury car maker. Cineworld, which has been criticised for its debt, has announced another big deal with the acquisition of Canada’s Cineplex.

Novartis dropped hopes for what it thought would be a billion-dollar-selling asthma drug.

— A look at the day ahead from EMEA Markets Editor Mike Dolan. The views expressed are his own —