UK General Election: One more day to go
Cable’s recovery was due to nothing but a broad USD weakness in Asia. Nobody should expect any more enthusiasm in the UK equities, bonds or currency markets the day before the UK general election. The UK voters seem to have hard time giving preference to one party or another. With the front running Conservative and Labour parties assessed at 30-35% support each, a coalition seems to be inevitable. The million dollar question is: which coalition. While the Tories may approach UKIP, led by the anti-EU Nigel Farage to push hard for an EU exit referendum, the Labour party could team up with SNP, a possibility that has been plainly denied by Labour leader Miliband. In his interview to the BBC on Monday, Miliband said that no deal is being envisaged with the SNP. That has been a new piece of information in the market and was clearly not in favour of the buy side as it only added an extra level of complexity in the UK’s political situation, where there is no need for additional mud in the picture. This being said, the day before the General Election is certainly not the best timing to carry the sizeable downside risk in the UK market. True, the post-election period is where everybody expects the famous relief rally, which certainly should trigger a self-fulfilled push across the UK markets. Indeed, the market is reinforcing the upside hedge for the week following the election: May 15 calls on FTSE with 7050/7100 strike cost 16% and 7% more expansive today, whereas 7000/6700 puts are 12% to 16% cheaper. But the post-election complexity in the UK will most likely counter the relief grasps both on equities and bonds if no resolution will come out on Thursday’s vote.
The FTSE stocks couldn’t make it higher than 7053 yesterday even after HSBC’s Q1 earnings beat the market estimates. The steepening in Gilt curve pushed 10-year yields above 2% (highest since December). GBPUSD’s rally to 1.5241 in Asia has been quickly reversed to intraday lows as soon as Europe stepped in. The UK’s idiosyncratic risks should comfortably offset the erratic USD sentiment before Friday’s NFP release. The vanilla puts on GBPUSD are waiting to give a further downside push below 1.5170/1.5130 and 1.5100 at today’s expiry.
ADP in focus
In the US, the ADP report will be the data focus today and should slowly start shaking the USD-complex before Friday’s NFPs. Even if some consider the ADP report as prediction for the NFPs, it is worth noting that over the past forty months, the correlation between the ADP and the NFP prints has not exceeded 25%. Moreover, to gauge the performance of the US jobs market, the improvement in wages will be as important as the jobless rate and the NFPs. A second consecutive monthly release below 200K could further damage the expectations that the Fed will start policy tightening before the end of this year. In this context, the upside in the USD will certainly be bumpy.
This report has been prepared by Swissquote Bank Ltd and is solely been published for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any currency or any other financial instrument. Views expressed in this report may be subject to change without prior notice and may differ or be contrary to opinions expressed by Swissquote Bank Ltd personnel at any given time. Swissquote Bank Ltd is under no obligation to update or keep current the information herein, the report should not be regarded by recipients as a substitute for the exercise of their own judgment.
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