Dutch help stocks get high

Dutch help stocks get high

The potential for market disruption from a day with multiple contract expiries never materialised. Stocks edged higher during ‘quadruple witching’, supported by stability in the price of oil, while still rejoicing populist defeat in the Dutch election.

The mere fact that an anti-EU party didn’t come to power in the Netherlands justifies the positive reaction in markets. The longer term effect could be a little more nuanced. Mark Rutte’s VVD party may have won the most seats, but it controls 25% less than after the 2012 election and Geert Wilders’ PVV gained 33%.

If the Dutch result tells us anything, it’s that political discontent means more votes outside the political mainstream on both the left and the right. In our view, the Dutch election result was not an endorsement of the EU; it was just a rejection of the far right. If that’s true, then political union will still be an uphill struggle, keeping breakup risk alive.

Pan-mure British company takeovers

All the signs are that the British government will deny the SNP the right to hold a second Scottish referendum. The associated drop in political risk helped the FTSE 100 make a new record high on Friday.

The takeover of stockbroker Panmure Gordon by former Barclays boss Bob Diamond and his Qatari backers helped the shares of financial firms outperform. The Utilities sector was under pressure after Prime Minister Theresa May promised to make energy suppliers ‘work for everyone’ – presumably meaning lower energy bills, and thus lower profits.

The FTSE 100 seems to have found a foothold above 7400, suggesting 7500 is probably not far away. With UK investor confidence running high, perhaps the biggest risk to more gains in the near term is a bigger rebound in Sterling, which has had a negative relationship with bluechip stocks since the referendum. 

Come on IndyRef !

The British pound had a subdued final day to the week. Sterling’s fortunes have improved thanks to signs of policy convergence between the Federal Reserve and the Bank of England. The Fed’s ‘dovish hike’ juxtaposed with a ‘hawkish hold’ from the BOE is a tasty recipe for gains in the pound against the dollar. Current Sterling strength could be nothing more than a short-covering rally, but the muted reaction to Nicola Sturgeon proposing a second Scottish referendum earlier in the week speaks to underlying strength in the currency. 

A poll showing Marine Le Pen extending her lead over main rival Emmanuel Macron in the first round of the French Presidential election saw the euro sink on Friday. The sense that political risks have subsided since the defeat of Geert Wilders in the Dutch election has contributed to euro strength this week. The belief that Le Pen will ultimately lose to Macron in the second round of the French Presidential election persists despite Le Pen’s strong polling.

Oil bulls lick wounds, Gold & Fed speak

Oil closing higher for the week will come as some to relief to the traders who before last week had the biggest bullish position on record. The pain may not be over quite yet. The surprise drawdown in US crude inventories this week has offered what may just be temporary relief. Questions over the size of and compliance to OPEC output cuts remain, and are a headwind to further oil price gains.

It was another week that where gold refused to lay down and die. Having seen hefty losses in the lead up to the Fed meeting, gold has rebounded strongly since. We remain positive on precious metals over the medium term, but whether we’ve seen a short-term bottom may rest with Fed speakers including Janet Yellen next week. The markets reacted to the latest Fed decision as if it had cut rates. If FOMC policymakers want investors to believe each meeting is ‘live’ then they may try to readjust market expectations with more hawkish rhetoric in speeches next week. We actually think the Fed will be content with being able to raise rates without rattling markets. If Yellen and co continue to infer three rate hikes this year, that should be near term dollar-negative.