Markets roiled by elections

Stocks roiled by elections

An unexpected UK snap election threw market participants for a loop after the Easter break. MPs are expected to vote in favour of Theresa May’s plan for a general election to be held on June 8. The negative reaction in the FTSE 100 to the snap election is, in our view, mostly currency-related.
   
It looks like markets are repeating Trump and Brexit pre-election patterns of weakness before the 1st round of the French presidential election on Sunday. On those occasions there was selling 1-2 weeks prior and then a sudden relief rally. We’d expect a similar pattern for the French Presidential election, with the rally to occur between the 1st and 2nd rounds.

Miners lead the way lower

That iron ore prices are descending further into bear market territory is a particular worry for the FTSE 100. Commodity and multinational companies have contributed some of the biggest gains in the last 12 months.

Sterling looking snappy

The kneejerk positive reaction in the British pound to the snap election aligns with our view Sterling has seen its worst. The British pound dropped on news of a surprise announcement from Theresa May on Tuesday but rebounded when the snap election was called for June 8th. We expect the re-election of Theresa May with a larger majority and bigger mandate to take on the EU in Brexit negotiations. It would appear markets are moving more on the traditional assumption of market-friendly Conservative Party policies than from a Brexit perspective. A snap election probably makes a so-called ‘Hard Brexit’ more likely because of the bigger Tory majority.

Gold turnaround on snap election

The main drawback to a snap election is the potential for additional uncertainty. Gold, the ultimate haven rebounded off the day’s lows following Theresa May’s unexpected announcement. We believe the election may reduce uncertainty since the Tories would likely run away with it, reinforcing the existing power structure. Markets have accepted Brexit so a snap election should just help Theresa May’s chances of getting a better deal for the UK. The geopolitics have dialled back a bit but it’s lurking in the background and could ramp up anytime, adding to demand for havens like precious metals.

  
North Korea first, dollar last

The idea that Donald Trump is dramatically turning his back on his ‘America first’ policy as well as his comment that the dollar is “too strong” are hurting the US currency. The more attention the new president pays to world stage including North Korea and Syria, the less chance there is of a reflated America. The comment from Treasury Secretary Mnuchin that long term dollar strength a good thing seems to have had only a fleeting positive effect on the greenback. We see a good chance USDJPY drops below 1.08 in the near term.