Pound lower as Labour narrow the gap

Sterling is trading lower across the board in the final trading session of the week with the latest poll showing a narrowing of the conservative lead for the upcoming general election. The FTSE 100 has been boosted by the drop in the pound with the leading UK stock benchmark posting a record high not long after the open this morning.

Best poll since Corbyn became leader

The conservative lead over Labour has been slashed to just five points according to a YouGov poll for the Times, with the 38% achieved by the latter the best showing since Jeremy Corbyn took the party leadership. With the gap now at 5% after being double-digits just weeks ago the markets are starting to think that this election may not be as much of a foregone conclusion as widely assumed following its announcement. The pound surged when Theresa May called a snap election just over a month ago, with the reasoning seemingly that the vote would increase the PMs political power going into the Brexit negotiations.

No sure things

However, as is often the case in politics - and markets for that matter -  a large consensus view on an upcoming event should serve to act as a warning. Due to the nuances of the UK political system it still remains unlikely that the incumbent Conservative government will be ousted but should the swing seen in this latest survey be replicated across all constituencies on June 8th, then the working majority would be slashed from the 17 at present to just 2. It remains hard to see a path for Corbyn into number 10, but a hung parliament is becoming an increasing possibility and this eventuality, or even a razor thin margin for the Tories, would make a mockery of their reasoning for calling the early election. There’s still quite some way to go till we get there however, and this latest poll should be put in the correct context as an early warning sign to the Conservatives. Nonetheless, the UK public are set to head to the polls once more in June after a Conservative PM called an unnecessary vote in an attempt to pull off a coup de grace; instead, we could be set for a case of deja vu.   

Oil tumbles as OPEC extend cuts

Brent crude, an international benchmark for the oil price, fell sharply by more than 4% Thursday despite OPEC announcing an extension to their production cuts. The current reduced levels of production have been in place since the start of the year and whilst there announcement last November supported the oil price, their implementation has failed to spark the rally that many members had hoped. Brent had risen by just shy of 20% in the past month heading into the meeting and whilst the drop could be attributed to simply profit taking, there appears to be something more to it. The market has held around the $50 a barrel mark for much of the year despite the lower levels of output and a 9 month extension has left oil bulls disappointed, with deeper cuts presumably having been required for a rally.

What next for OPEC?

This leaves the members of the organisation in something of a pickle as they are loathsome of reducing supply as it reduces individual revenues, with previous attempts to lower output seeing numerous countries cheating on their quota. Simply put, every nation would like a higher oil price but historically few have been willing to forego desired levels of production to achieve this. This is even more worrisome for OPEC as the recent cuts have achieved an almost exemplary level of compliance and yet they have failed to do the trick. The second half of the year has typically seen around 2% greater demand for oil than the first 6 months, so there are some reasons to believe that the reductions will see a greater impact by year-end, but this is wishful thinking. With increasing output in the US - last week was the 18th consecutive weekly rise in rigs counts - due to improving efficiencies in the methods of extraction it could well mean that OPEC members will have to take more severe action should they wish to see oil back above the $60/barrel mark. Thursday’s failure to rally on seemingly good news could we be seen as a harbinger of things to come for the oil price in the weeks ahead.