• The result of the UK election exit poll overwhelmingly pointed towards a Conservative majority with a total of 368 seats vs. Labour 191 - Conservatives managed to cross the 326-seat threshold just before 0500GMT
• GBP immediately saw strength following the election exit poll with GBP/USD eclipsing 1.3500 to the upside from mid-1.3100 area
• China and the US have struck an agreement on some tariff reductions and a delay to the tariffs that were due to come into effect on December 15th according to sources
• Further sources noted that there will be a small reduction in tariffs on some Chinese goods as a gesture of good will, while Phase Two of the negotiations will begin after 2020 elections
• Asia-Pac majors were bolstered overnight, and US equity futures extended on Wall St’s fresh record levels
• In FX, DXY gave up the 97.000 level on GBP strength, EUR/GBP fell to its weakest since mid-2016
• Looking ahead, highlights include US Import/Export Prices & Retail Sales, Fed’s Williams & ECB’s de Guindos

UK ELECTION

The result of the UK election exit poll overwhelmingly pointed towards a Conservative majority with a total of 368 seats vs. Labour 191, presenting the Conservatives with an expected majority of 86. Even with a margin of error of around 15 seats, this stood the Conservatives well clear of the 326 required to govern. In an immediate reaction GBP saw strength across the board with GBP/USD jumping from around the mid 1.31 level to 1.3514; the highest since June 2018. Support for GBP stemmed from the implications for the Brexit process given that Johnson stated that all Conservative candidates had agreed to approve the withdrawal agreement in the HoC, the passage of the bill is all but certain (date tbc).

As the results of individual seats were announced, the findings of the exit poll appeared to be vindicated with Labour broadly either seeing their majority in key seats dwindle or change hands with the Conservatives. As such, the market reaction during the announcement was relatively limited with the Conservatives managing to cross the 326-seat threshold just before 0500GMT; the final result and extent of the majority is yet to be confirmed.

US President Trump congratulates UK PM Johnson on winning the UK election, adds that UK and US are now free for a "massive new trade deal" post-Brexit, "This has the potential to be far bigger and more lucrative than any deal that could be made with EU". (Twitter)

What lies ahead? As we mentioned in our commentary, with the passage of the Withdrawal Agreement almost a given, focus will at some stage turn towards the transition period with the EU which is due to expire in December 2020. A decision on whether to extend this (end of December 2022 is the limit of any extension) is due at the end of June. However, Johnson has backed himself into a corner by stating he would not extend the transition period and therefore in theory, the possibility of a cliff-edge exit is still live. When this becomes the source of focus for the market is yet to be seen, however, the decision over whether to extend or not will likely be set for a much rougher ride than the passage of the WA. From a European perspective, BBC’s Adler has already reported that “Brussels does not believe an ambitious trade deal is possible to be negotiated and ratified by December next year as PM Johnson claims, with the only possibility in the short time said to be a quick and dirty free trade deal on EU terms”

TRADE

China and the US have struck an agreement on some tariff reductions and a delay to the tariffs that were due to come into effect on December 15th according to sources which added that China has agreed to purchases of USD 50bln in agricultural goods in 2020, while other source reports also stated the US will announce the trade deal today. (Newswires)

Fox Business' Lawrence tweeted that a source stated the December 15th tariffs will not go forward and there will be a small reduction in tariffs on some Chinese goods as a gesture of good will, while Phase Two of the negotiations will begin after 2020 elections.  Furthermore, the source said a signing ceremony will not happen with President Xi and there will be a rollout of the agreement by the White House Friday, while the Chinese have requested that the language of the never be made public. (Twitter)

China leaders are yet to accept the deal (referring to the 'big deal' US President Trump tweeted about) a number of issues: USD 50bln purchases is a hard target, other trade partners complaining at a reallocation who could challenge the WTO., CNBC's Yoon citing sources. (Twitter)

Certain US lawmakers urged US Secretary of State Pompeo and US Commerce Secretary Ross to sanction China related to its actions in Xinjiang, while there had also been separate comments from Chinese Foreign Minister Wang Yi that US actions have caused serious damage to the hard-won mutual trust between China and US. (Newswires)

ASIA-PAC

A broad heightened appetite for risk was seen overnight with the Asia-Pac majors bolstered and US equity futures extending on Wall St’s fresh record levels as markets reacted to reports that US and China have struck an agreement on some tariff reductions and a delay to the December 15th tariffs, while China is said to have agreed to purchases of USD 50bln in agricultural goods in 2020. In addition, focus was dominated by the UK election results in which PM Johnson’s Conservatives are on course for an overwhelming 86-seat majority according to exit polls. ASX 200 (+0.5%) and Nikkei 225 (+2.6%) were lifted with financials after banking regulator APRA advised ADIs it will delay finalizing consultation on implementation of product responsibility requirements until H1 next year but with hefty losses in gold miners restricting gains for the index, while the Japanese benchmark broke through the 24k milestone to print its highest since October 2018 with a somewhat disappointing Tankan survey doing little to contain the rally. Hang Seng (+2.1%) and Shanghai Comp. (+1.3%) were also buoyed on the flurry of positive trade rhetoric as aside from the source reports of an agreement being reached in principle, there had also been optimistic comments from US President Trump regarding a trade deal and WSJ initially noted US negotiators offered to cut existing tariff rates by up to 50% although no official announcement has been made yet from either side. Finally, 10yr JGBs retraced some of the prior day’s losses which had been the by-product of the dramatically improved trade climate, with the rebound also helped by the BoJ’s presence in the market for over JPY 1.1tln of JGBs concentrated in 1yr-10yr maturities.

PBoC skipped open market operations for a net neutral weekly position. (Newswires) PBoC set USD/CNY mid-point at 7.0156 vs. Exp. 7.0139 (Prev. 7.0253)

Japanese Tankan Large Manufacturing Index (Q4) 0 vs. Exp. 2 (Prev. 5); lowest since March 2013. (Newswires) Japanese Tankan Large Manufacturing Outlook (Q4) 0 vs. Exp. 3 (Prev. 2) Japanese Tankan Large Non-Manufacturing Index (Q4) 20 vs. Exp. 16 (Prev. 21) Japanese Tankan Large All Industry Capex (Q4) 6.8% vs. Exp. 6.0% (Prev. 6.6%)

UK/EU

BBC’s Katya Adler tweeted that EU leaders will formally welcome the result assuming it is a Tory majority and will call for speedy ratification of the Brexit deal in Parliament, while they will underline the ambition for a broad comprehensive EU/UK trade deal. However, she added that Brussels does not believe an ambitious trade deal is possible to be negotiated and ratified by December next year as PM Johnson claims, with the only possibility in the short time said to be a quick and dirty free trade deal on EU terms. (Twitter/BBC) FX

In FX market, currencies have been solely occupied by the UK election in which GBP/USD rallied to its highest since June 2016 to test the 1.3500 handle following the exit polls which showed Conservatives were on course for a considerable victory of 368 seats vs. Labour at 191 seats, and well over the 326 needed for an absolute majority even when taking into account the margin of error of around 15 seats. The strength in GBP subsequently pressured EUR/GBP to its weakest since mid-2016 and also dragged the DXY firmly below the 97.00 level which the greenback’s major counterparts were quick to take advantage of including EUR/USD which was propped up to just short of resistance at 1.1200, while AUD/USD and NZD/USD also briefly built upon their mild US-China trade inspired gains. Elsewhere, the broad appetite for risk spurred outflows from safe havens JPY and CHF, while CNH strengthened to below the 7.0000 level against the greenback amid the plethora of trade optimism.

BoC Governor Poloz said we don't put a lot of weight on individual data points especially labour data but suggested that the overall trend has been positive, while he suggested they would look at other indicators not just jobs as the labour market tends to lag when asked about an insurance cut if jobs data falls for a third month. Furthermore, Poloz added the bank is seeing a bottoming out of most indicators in the global economy. (Newswires)

COMMODITIES

Price action across commodities was mostly uneventful as the complex took a back seat to the equity and FX markets with focus overnight centred on the UK election results. Nonetheless, WTI crude futures still eked mild gains as markets also digested source reports that US and China have reached a trade agreement to avert the December 15th tariffs and reduce some of the tariffs already in place which could be announced later today, but with gains capped on some mild unwinding of geopolitical risk premium as Saudi Arabia is said to be looking to ease tensions with Iran and with price action stuck around USD 59.50/bbl level. Elsewhere, gold remained lacklustre following the prior day’s volatility where the precious metal wiped out initial gains as risk appetite was buoyed by the encouraging US-China trade headlines, while copper prices also reflected the broad optimism and recently notched a 7-month high.

Australia Port Hedland iron ore exports 43.3mln tons vs. Prev. 42.0mln tons. (Newswires)

GEOPOLITICS

Saudi Arabia is looking to ease tensions with Iran as the Kingdom grows more worried about conflict risks. (WSJ)

US Special Envoy for Afghanistan said they will be taking a brief pause from talks with the Taliban following the attack on an American base earlier this week. (Newswires)

EU leaders agreed to extend economic sanction on Russia regarding Ukraine, according to diplomatic sources. (Newswires)

US 

The TPLEX sold off sharply on Trump’s tweet of a “big deal” in China, in addition to the WSJ reporting existing tariffs would be slashed, as part of a cross-asset risk on move, although saw a late session leg lower on reports a Phase One deal was ready to be signed off on, with Trump’s signature being awaited on, although participants are still waiting for absolute confirmation of a deal and that Sunday’s tariffs will be delayed. The attractive yields brought stellar demand to the US 30-year bond reopening auction, with a high yield of 2.307%, the auction was covered 2.46x (firmly above the average 2.23x), stopping through the WI by 2.1bps, a rare occurrence in the long bond. The takedown was just as promising, with dealers taking just 15.5%, 10ppts beneath the average, seeing both directs and indirects take above average; the auction saw a fleeting bid in the 30-year bond as the wider risk appetite prevailed. US T-note (H0) futures settle 28+ ticks lower at 128-12+.

NY Fed said its T-Bill purchases will remain at USD 60bln for the next month and it is to increase its overnight offering to USD 150bln (Prev. 120bln) on December 31st and January 2nd. The Fed also set 10 term repo operations over the next month, starting with a 32-day auction on Monday 16th whilst increasing the limit to USD 50bln from USD 25bln. (Newswires)

US House Appropriations Chair Lowey said a deal has been reached to avert the US government shutdown. (Newswires)