Tuesday 18th April 2017
Poll-Fatigue anyone ? Brace yourselves ...... here's another one.
ref : General
It's not as though there's nothing else to think about on your return from your Easter break .... not least a bellicose war of words between the USA and North Korea. One might be forgiven for thinking that we are being taken as close to a nuclear conflagration as we've been since the Cuban Missile Crisis of 1962. Let's hope that the USA's prime motivation behind their own sabre-rattling response to North Korea's apparent lust for confrontation is to "encourage" China to put the pressure on their rogue neighbour, as many of the sages suspect. From a market point of view, much of the safe-haven seeking took place at the end of last week (buying Jap Yen, for example) , but US Treasuries and other sovereign bonds are still getting bought and stock markets are on the defensive. Put like that though, it doesn't seem like too much of a reaction considering how high the stakes are. Time will tell whether the markets are showing admirable sangfroid or a touch of complacency.
Then there's the French election -- first round on Sunday, remember. If the most likely scenario is still that Macron and Le Pen progress to the run-off on March 7th (and that Macron wins it convincingly), the latest polls did nothing to discourage the idea that this is still a four-horse race, with the talking horse in the betting being hard-left but newly-cuddly Jean-Luc Melenchon. The long-shot possibility of a run-off between Le Pen and Melenchon is still alive and relatively well, with all its nightmarish ramifications for French assets. But the yield spread between German Bunds and French Government Bonds (OATS) is trading at 70 basis points this morning, and since investors were demanding a bigger premium for OATS last week, you'd have to conclude there's no great panic on this front either.
News of the day is UK Prime Minister Theresa May calling a snap general election for six weeks time. Spare a thought for the UK electorate who will now be able to list a Scottish Independence referendum, a general election, a Brexit referendum, the threat of another Scottish Independence vote and another general election in quick succession. There are some long-established democracies that seemed to exist well enough with an annual poll, but in the UK it's enough to make some people wonder whether democracy's all it's cracked up to be after all.
Mrs May will ask parliament tomorrow to give her the two thirds majority needed to call an election. She'll get it, of course ..... no major party in opposition is likely to say publicly "No thanks, we'd rather stay out of power", even if the forthcoming vote has the potential to do it some serious damage. The Prime Minister is clearly hoping to secure herself a much bigger majority at the expense of Jeremy Corbyn's Labour party, which may still offer a home to the more radical socialists but runs the risk of losing many of its traditionally centre-left supporters.
With a lead of over 20% in the latest poll, Mrs May has good reason to feel confident but is already being accused of political cynicism after denials that an election was in the offing as recently as last week. To which her answer is that with such a small majority as it currently stands, she would be unable to get the requisite support for her Brexit policies to get them through the House of Commons. As she puts it, she needs to get Westminster behind her in the same way that the people are, or at least have voted for in the referendum. Hence, her "reluctant" decision.
And the markets ? Sterling is hitting 10 week highs, with £/$ at 1.2732 and £/€ well through 1.1900. Conversely, stocks are lower with the FTSE 100 index down 150 pts. This is of course a reflection of the number of international stocks in the index that are hurt by a stronger pound, but to be fair the index was already under the cosh from a tumbling iron ore price and what that might mean for an index heavy with mining stocks.
We can of course see why a stronger hand for the government after an election might be taken as supportive for the currency, but you know it's funny ...... it's not long ago that developments that meant that the government would have to make comprises were also seen as supportive. Which just goes to show how fickle markets are, but as we've said many times before, knee-jerk reactions are extremely unreliable.
So here's one of our own anyway ..... we can see that a general election in the UK in six weeks time is likely to be hugely significant in terms of domestic politics, but we not at all sure it means that Britain is likely to emerge from the Brexit process any better off. From that point of view, a new political landscape in the UK may not cut much ice with those European officials tasked with negotiating terms. Whilst sterling's action in response to the election announcement is interesting, even a positive result for Mrs May is not guaranteed to count for very much in the longer run.