Will EU talks improve the pound’s prospects?

Sterling will be back in investors’ sights on Monday, when UK and EU negotiators are scheduled to meet in London to hammer out an arrangement on their post-Brexit relations by the end of the month.

After four days of talks last week, Michel Barnier, the EU’s chief negotiator, raised the prospect of a deal, and the pound responded. Having started July on a lacklustre note, it gained 1 per cent over the week, trading at $1.24 on Friday from an intraday low of $1.22 on Monday.

Unless the UK meets its self-imposed end-July deadline for a trade deal with the EU, it will drop out of the EU’s single market and customs union at the end of this year, having left the bloc in January.

Preparations for a no-deal outcome are still under way. German Chancellor Angela Merkel said on Thursday that the bloc had to prepare for a worst-case scenario. This has kept some strategists on edge.

“We think that the headwinds to sterling are mounting and are likely to intensify in the second half of the year,” Bank of America analysts said in a note.

But some strategists say recent developments offer hope that sterling could shift higher.

Derek Halpenny, an analyst at MUFG Bank, said the more positive note struck by the EU late last week suggested a deal was now “more credible”.

“We have been very dubious of the UK deadline of a deal being outlined by the end of July. So if that assumption proves wrong, we would certainly see grounds for sterling’s outperformance,” Mr Halpenny said. Eva Szalay

Will gold continue its ascent?

As the price of an ounce of gold hovers close to $1,800 for the first time in nine years, analysts and investors are asking whether the precious metal’s rise will continue — or if profit-taking will drag it back down, after a nearly 16 per cent gain this year.

Joni Teves, analyst at UBS, believes the latter is more probable. She says this is likely to be the case even though gold’s big disadvantage as a financial asset — that it provides no income — has become increasingly irrelevant with safe instruments such as US government bonds effectively paying investors a negative return if held to maturity.

“Real rates are already around the lowest levels in seven years. This raises the risk that any bounce from recent lows takes a bit of shine off gold, triggering some unwinding at least in the near term,” she said.

After Thursday’s strong jobs report, US government debt came under modest selling pressure, pushing the benchmark 10-year Treasury yield up 0.03 percentage points to 0.7 per cent. Gold, meanwhile, fell back to $1,768 an ounce, down from $1,788 earlier in the week. By Friday afternoon, it was trading at around $1,782.

Set against that is evidence of strong demand for gold, along with gold-related equities, from a growing pool of investors worried about the inflationary impact of unprecedented central bank stimulus. 

Recent share sales by Harmony Gold and Polyus Gold were met with strong interest, while demand from gold-backed exchange traded funds — which purchased a record 625 tonnes of bullion in the first half of the year — remains elevated. Citi reckons ETF purchases could total 900-1,000 tonnes by the end of the year and that jewellery demand in Asia could also start to pick up from low levels. Neil Hume

Where next for Hong Kong’s stock market? 

Hong Kong’s stocks have faced a series of challenges over the past 12 months, including anti-government protests and coronavirus. Now they face a new threat — Beijing’s imposition last week of a controversial national security law.

Traders have so far shrugged off the latest political drama, which has sparked international condemnation and fears that Hong Kong’s days as a global financial hub are numbered. The benchmark Hang Seng index gained 2.7 per cent the day after police arrested hundreds for protesting against the legislation, which gives China sweeping powers to target acts it deems seditious. 

Some investors are bullish. Credit Suisse expects Hong Kong stocks to outperform many other developed markets this year. The bank points to inexpensive valuations, a healthy dividend yield and an improving economic picture in China, which appears to have Covid-19 largely under control. 

Hong Kong’s market has also benefited from rising tensions between the US and China. The Trump administration’s moves to apply pressure on Chinese companies listed in New York have coincided with a flurry of big-ticket secondary offerings in Hong Kong, including internet groups NetEase and JD.com.

Some analysts think more international investors could be drawn to the market as it pivots away from banking and property stocks towards areas such as online shopping. As that happens, “Covid-19 will be less of a drag and more of a boost for Hong Kong,” said Andrew Sullivan, a stock broker in the city. Daniel Shane

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