Pound: “We did not mean to vote for Brexit”

Friday June 9: Five things the markets are talking about

It’s little surprise to see sterling tumble, as much as -2.4%, after a disastrous night for the PM Theresa May’s Conservatives party, who with an electoral swing, lost her parliament majority with a hung House of Commons.

The key concern driving U.K asset prices, aside from market liquidity issues, is how this election will impact Britain’s ongoing divorce with the European Union, which Prime Minister Theresa May had already begun three-months ago.

The Conservatives, as the party with most seats (316), will have first shot at trying to form a new government either as a formal coalition with another party or by relying on other parties to help vote through its policies.

If they can’t build a majority large enough to govern, the Labour Party (261) would get a chance to form a government.

What’s left is that the market again faces more political uncertainty and with Comey’s testimony in Washington yesterday, it’s on both sides of the Atlantic.

Note: This morning’s press conference – PM May said she will not step down as PM and is in talks with senior party colleagues about how to form a new government.

For more political intrigue it’s now onto French where voters go to the polls this weekend as part of a two-step process for parliamentary elections. The outcome will decide how much control President Macron will have to enact his legislative agenda.

1. Global stocks mixed results

In Japan, the Nikkei 225 stock average rallied +0.5%, supported by the index heavyweight SoftBank who rallied +7.4% to the highest in 17-years after agreeing to buy Boston Dynamics from Google parent Alphabet Inc. The broader Topix index rose +0.1%.

In Hong Kong, the Hang Seng fell -0.2%, the Hang Seng China Enterprises Index lost -0.6% and the Shanghai Composite added +0.3% – data overnight showed China’s producer price gains moderated following further easing in commodity prices.

Elsewhere, South Korea’s Kospi index climbed +0.8% and Singapore’s Straits Times Index added +0.5%.

In Europe, indices are trading higher across the board, but off the earlier session highs with outperformance in the FTSE 100 benefiting from -2% slide in the pound (£1.2720).

In the U.S, stocks are set to open in the ‘black.’

Indices: Stoxx50 +0.5% at 3580, FTSE +0.7% at 7499, DAX +0.5% at 12775, CAC-40 +0.6% at 5294 IBEX-35 +0.2% at 10975, FTSE MIB +0.6% at 21165, SMI +0.3% at 8839, S&P 500 Futures +0.2%

2. Oil prices resume slide as supply glut prevails

Global oil prices have resumed their downtrend ahead of the U.S open following steep falls this week, pressured by widespread evidence of a fuel glut despite efforts led by OPEC to tighten the market.

Brent crude is down -20c at +$47.66 a barrel, around -12% below its opening level on May 25, when an OPEC promise to restrict production was extended into 2018. U.S. light crude (WTI) is down -20c at +$45.44.

Not helping the supply glut is U.S supplies and production rates. U.S data this week showed a surprise +3.3m barrel build in commercial crude oil stocks to +513.2m. Inventories of refined products were also up, despite the start of the peak-demand summer driving season.

Note: U.S. refined oil product inventories are now back above 2016 levels and well above their five-year range.

Technically, the world is awash with crude and more production is coming. Libya’s 270k-bpd Sharara oilfield has reopened after a workers’ protest and should return to normal production by next week.

In early trade, gold (-0.4% to +$1,274.95) has fallen for a third day as the USD firmed after the U.K national election results left no single party with a majority.

3. Yields back up

Yesterday, the ECB kept its monetary policy unchanged, but changed its forward guidance by removing its easing bias regarding policy rates. German 10-year Bund yields are flat at +0.25%.

French 10-year yields have fallen -1bps ahead of this weekend’s parliamentary election.

In the U.K, despite the political uncertainty, asset prices moves remain very well contained. U.K 10-years Gilts U.K. gilt yields rose +2 bps to +1.06%, after climbing +3 bps yesterday. The inconclusive U.K general election results will make it almost certain that the Bank of England (BoE) will keep monetary policy ultra-loose to support growth.

The focus now switches to next week’s Fed decision (June13-14). For many, the big question is if the Fed does hike next week is whether it would leave the door ajar for further monetary tightening in the months to come. The yield on 10-year Treasury notes has rallied +1 bps to +2.20%.

4. Pound plummets on political woes

It’s little surprise that the focus in FX overnight was the pound and the U.K election results.

Sterling began the European session testing its two-month lows atop or £1.2635 on the possibility that PM May would not be able to acquire a solid majority. It has since recovered to trade back above £1.2741 on fundamental support – U.K showed industrial production weaker than forecast in April, but the trade deficit narrower more than expected.

Sterling remains down close to -2% compared with just before exit polls were released late Thursday.

The ‘big’ dollar remains slightly firmer against other major pairs in relatively quiet trading with focus on the Fed rate decision next week. The EUR (€1.1179) is a tad softer after yesterday’s ECB meeting and quarterly staff projections.

The yen (¥110.38) has not responded to any safe-haven demand after the PM May’s disastrous election.

5. Germany’s trade surplus steadies in April

Data this morning showed that Germany’s adjusted trade surplus was unchanged in April, after exports and imports picked up further compared with the previous month.

Total exports of goods increased for the fourth consecutive month to a record of €106.3B in April. Goods imports rose by +1.2% to €86.6B (record).

This resulted in a stable trade surplus of €19.8B – the market was expecting €20B.

Note: German exports have picked up notably since the start of the year, led by stronger demand from China and India.

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