Stocks sprightly at the start of the week

There’s been an upbeat start to the new week for stocks, with benchmarks across Europe rallying and US futures trading firmly in the green. Equities are looking to recoup some of the recent heavy declines and have received a twin boost on the political front with the EU formally approving May’s Brexit plan over the weekend and positive noises coming out of Rome suggesting some compromise on the planned Italian budget deficit. A rise in the Oil price has also given some let up in the dour market sentiment after crude prices plunged last week to fall to their lowest level in just over a year.

May seeks Brexit deal support    

While the weekend’s developments on the Brexit front were no doubt pleasing for PM May, it was really just a case of dotting the i’s and crossing the t’s on her deal and the real challenge remains getting it through parliament. With a Commons vote pencilled in for 12th December, the PM has a little over 2 weeks to sell the agreement to the public and MPs. It remains unlikely that this will be achieved, with the chances of the deal being voted down being given a 75-80% probability but even if this does occur it may not be the end of the matter.

A “TARP” scenario whereby an adverse market reaction to the deal being rejected causes MPs to reconsider their stance and change sides is gaining popularity, but it is a dangerous game to rely on this to get the deal approved. Markets are inherently forward thinking and if traders and investors are of the belief that this will occur, then it would mitigate the negative reaction in a kind of sell-the-rumour-buy-the-fact move. The pound is little changed on the day and while it is edging higher against the US dollar in recent trade, this is more due to weakness in the buck than strength in sterling.

Oil looks to recover after heavy declines

Last week saw a double-digit decline for brent crude, an international benchmark for the oil price, as the sell-off that began at the start of October deepened. The market has fallen by around ⅓ in a little over 7 weeks as managed money has performed a dramatic U-turn in positioning after greatly overestimating the impact of Iranian sanctions on the supply side. The latest speculative positioning data shows an aggregate net long position of just 183k contracts, the most bearish funds have been since December 2015. Extreme positioning can often precede significant turning points in the market - as we saw at the start of last month when net longs reached multi-year highs - but it would be brave to call a bottom in this market as the practice at present resembles trying to catch a falling knife.