No deal on Brexit but USD and EUR have their own problems

So far it has been anything but quiet in the markets in the run up to Christmas. Ongoing Brexit uncertainty is troubling both sterling and the UK retail sector. The US and Europe, however, have too many worries of their own to benefit from the situation.

Investors in UK retail stocks taking fright
Sentiment is building against UK-listed retail stocks which were leading the FTSE 100 down in early trading this morning. This follows ongoing reports that shoppers are simply not spending enough in the shops in the run up to Christmas. Investors are getting nervous, and they are generating a lot of red in some major retail names, all down over 2% in the first hour. Among these are Next, Ocado, and M&S. Traders were favouring the miners again, for a variety of reasons, not least their benefits as global diversifiers.

No deal on Brexit but USD and EUR have their own problems
It all points to a choppy week ahead in UK stocks, at a time when traditionally the City would be seeking to wind down ahead of the festive season. The lack of a deal on Brexit, with the prime minister still touring European capitals to garner further concessions, has the market focused on the possibility of another referendum or a general election to resolve the parliamentary deadlock. The pound has seen some heavy selling last week and has reached around the 1.259 mark versus the USD. Both the EUR and USD have seen some heavy selling pressure as well in recent days leading to a somewhat muted currency market this morning. The prime minister is due to brief the House of Common this afternoon on progress with her discussions in Europe last week.

Analysts voice concerns over US stocks, corporate borrowing
In the US the market is taking stock with many bigger buyers of equities now concerned that sentiment is waning – there is less good news to prompt further rises in Wall Street and the mid-term elections have made it harder for the Trump administration to produce further boosts like tax cuts. Many investors are expecting the dollar is going to lose some value in Q1 and this may even force the Fed to reconsider the rate hikes everyone is expecting next year. However, the Fed meets Wednesday and economists are anticipating another rate hike this time around. There is also the threat of a government shutdown at the end of the week as Trump continues to tussle with Congress.

US credit market
The big worry seems to be the US credit market – one big barometer of corporate confidence is the high yield market and it does look as if big companies have reversed their borrowing trend and are tightening their belts. Yields on junk bonds in the US have soared by over 100 basis points since mid-September and this was also – not coincidentally - the height of the US equity bull. Many Wall Street analysts are now expecting a big reversal in US stock prices. The S&P 500 has been highly volatile in the last three months, but the trend has been down, off the highs established in September.