Europe rather than the US is holding centre stage right now.
UK
This week’s surprise election call by British Prime Minister Theresa May helped briefly push the pound over $1.2900 – a five-month high. The currency has since unwound some of those gains and was trading at $1.2800 today. The timing of the election seems like an astute political move from May, as the U.K. economy is in something of a sweet spot, with low unemployment and consumers yet to feel the pinch from rising inflation. The latest polls have her Conservative Party 21% ahead of the nearest rivals.
The need to be less bearish on Sterling stems from the fact that an expanded majority for the Conservative party at the June 8th election will free Mrs May of the constraints of a 2020 election. Mrs May would be able to negotiate a longer transitional period for leaving the EU and reduce the prospects of a ‘hard Brexit’ and the cliff-edge that had been feared.
However, the FTSE 100 tumbled 2.5 per cent on the news – its biggest one-day decline since the aftermath of last June’s Brexit referendum – as Sterling surge weighed on the many global FTSE 100 companies that receive a significant amount of revenue in US Dollars i.e. Sterling’s surge translates to lower Sterling profits from such earnings.
Europe
Ahead of the first round of voting in France’s presidential election this weekend, polling is suggesting it will be a close call. Every poll for the past month has shown independent Emmanuel Macron and the National Front’s Marine Le Pen taking the top two spots. Macron would then easily win the May 7 runoff, polls show. Yet both front-runners have been steadily slipping over the past two weeks, and Republican Francois Fillon and Communist-backed Jean-Luc Melenchon are now within striking distance.
Such uncertainty generally favours European bonds over equities, and money has flowed into European bonds, but European equities remain reasonably well supported by a growing belief that the European economy is finally facing a brighter economic future having had several difficult post-financial crisis years.
US
Geopolitical concerns have clearly been on the rise over the last couple of weeks with Syria and North Korea never far from the front pages. This has led to a more risk adverse investment environment putting US stock prices under pressure.
Investor seeking safety have moved into Treasury Bonds, Gold and the Japanese Yen as is normal in a ‘risk off’ world. Indeed with Trump failing to get his healthcare reforms through Congress a few weeks ago the whole Trump ‘reflation trade’ has come into question. Investors have moved back into bonds.The benchmark US 10-year yield has slid from a 2017 high of 2.63%, hit just before the US Federal reserve raised interest rates last month, to 2.20% – in market terms that’s a huge price move (remember yields down equals prices up and profits for bondholders).
As well as concerns over geopolitical risks, those moves also reflected an easing of expectations that the Federal Reserve would raise interest rates again at its policy meeting in June – particularly after the release of weak US inflation and retail sales data at the end of last week.
Commodities
Oil continues to trade in a fairly narrow range with Brent trading at $54 per barrel. Whether OPEC will extend its period of supply restraint, agreed last November, beyond the initially agreed six-month period is the key issue.
Gold is the classic safe-haven investment. It has been around as an investment vehicle for 5,000 years and will be around for 5,000 more. Despite its non-interest bearing status, in times of uncertainty, including today’s geopolitical concerns, gold is in demand and is currently trading at $1,280 per ounce, the highest level so far in 2017 up from $1,150 at the end of 2016.
Misc.
Morgan Stanley delivered very strong first-quarter earnings, delivering a big increase in bond-trading revenue which gave the bank sector sharp relief after Goldman’s weaker showing. Five of the big six US banks reported quarterly profits that were better than analysts had expected.
Equities
S&P 500: 2350
Nasdaq: 5890
FTSE 100: 7115
Bonds – 10 Year Government Yields
US 2.20%
EU 0.16%
GB 1.13%
Foreign Exchange
EUR/USD 1.0700 (1 euro buys 1.0700 dollars)
GBP/USD 1.2800 (1 pound buys 1.2800 dollars)
Commodities
OIL: Brent: 54.00 (dollars per barrel)
GOLD: 1280 (dollars per ounce)
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