Stocks likely to rally amid clarity on trade, Brexit

US stocks breached records last week after two of the biggest storm clouds hanging over the market parted in an instant. The last couple of weeks of the year could see more record highs, even if those levels prove difficult to sustain.

On the same day that the US and China declared a ceasefire in the long-running trade war, UK Prime Minister Boris Johnson declared victory in the even longer-running Brexit saga.

"Conservative Party majority (Brexit resolution) and reports of Phase One US-China trade deal to resolve two main global macro tail risks," said strategists at brokerage Bank of America Global Research, in a note to clients.

The timing felt like the climax of a classic novel, with all the loose ends coming together to set up a happy ending - at least from the perspective of stock-market bulls.

Even Federal Reserve chairman Jerome Powell, who had played Scrooge at this time last year with his tight-fisted monetary policy, pledged not to spoil the party, indicating that rate hikes were on hold.

"Overall, the outlook is now cemented for US stocks to march further into record territory," said Edward Moya, senior market analyst at foreign-exchange brokerage OANDA.

While a happy ending appears to be in sight, the denouement has not yet happened.

Stocks wobbled last Friday as enthusiasm about the "Phase One" trade deal waxed and waned.

As golden-age Hollywood producer Samuel Goldwyn once said: "A verbal agreement is not worth the paper it's written on." Joe Kinahan, chief market strategist at TD Ameritrade, said the rally could be postponed until the exact terms of the deal are publicised.

One detail leaked was that China would commit to buying as much as US$50 billion of US agricultural products in the coming year.

But agricultural-market monitors were quick to point out that, even in the most highly populated country on the planet, there is not enough demand for US$50 billion of American soybeans and pork, even if US farmers were able to find the supplies. Even if the deal goes beyond modest expectations, it remains to be seen whether it will be enough to reverse the slowdown in global economic growth.

One thing that the trade deal could boost in short order is business confidence. It was a shortage of confidence that halted business spending, dragging down measures of industrial activity in the US and elsewhere in recent months, according to most economic analyses.

Add that confidence back in and the less statistically significant volume of goods directly affected by tariffs, and the outlook for near-term growth could see a significant boost.

On Brexit, Mr Johnson has a clear mandate to pursue a signed divorce agreement by Jan 31 next year as he has promised. Then comes the hard part. Mr Johnson, who has made enemies among EU leaders with his ridicule of the institution, will soon begin renegotiating terms of trade with the economic bloc. French President Emmanuel Macron has already set out his stall in this respect, saying that any efforts by the UK to shift its economy away from European standards on the environment and other categories would affect its access to the common market.

While negotiations continue, the "closure" that Mr Johnson celebrated on the Brexit issue could lift business confidence in the UK and Europe.

"If we do get a lot of this risk removed from the markets, you could start to see global growth forecasts updated by almost half a percentage point," said Mr Moya.

One saga, of course, remains unresolved - the Trump impeachment saga. For the market, at least, this is less of a worry than the trade negotiations and Brexit.

If, for some reason, the Republican Senate leadership changed their position on the validity of the case against US President Donald Trump, there could be an impeachment shock to markets. As it is, the most likely course of events is a House of Representatives vote in favour of impeachment before the New Year, and a Senate vote against removing Mr Trump from office shortly thereafter.

"The impeachment process has been underway for months, generating headlines all along the way," said Brad McMillan, chief investment officer at the Commonwealth Financial Network. "Yet, it hasn't derailed the economy or markets, both of which have shown continued slow growth. From an economic standpoint, impeachment simply hasn't mattered, and it isn't likely to."

There is scant economic and earnings data ahead of the Christmas break on the stock market, outside of consumer confidence and used-home sales surveys. Nevertheless, the weeks leading up to and immediately following the New Year are traditionally some of the strongest as stocks tend to drift higher and consumers gain in confidence.

More record levels are likely for the rest of 2019, but 2020 could see heightened volatility.