There is plenty of news out today to whet the appetite of investors with the UK election, a ECB policy meeting and the congressional testimony from ex-FBI director James Comey. Shares in Asia overnight fell as markets brace themselves for any surprises here, while markets in Europe and the UK opened flat. The story of the week has certainly been one of tentative trading, with equity markets drifting, oil prices tumbling while safe haven assets like gold reaching weekly highs.
The UK head to the polls today in what looks to be the most important election in decades as the eventual winner will lead the country into the Brexit negotiations. Similar to elections in the US and France, the two favourite parties have substantial differences, and this difference makes todays result all the more important. A Labour victory and we would most likely see a big sell off in the UK stock markets, particularly the FTSE 250 as Corbyn’s stated his desire to increase corporation tax and raise wages. This selloff would most likely drag sterling down with it as investors look to safe haven assets in the interim. This initial reaction may not be long lived however as Corbyn has vowed to retain the benefits of the EU single market, something which should make for a softer negotiations. A Conservative victory and we are back to a case of as you were and one would expect the equities and the pound to rebound somewhat, but with Brexit negotiations just around the corner this will most likely cap any substantial gains.
Of course market reactions do not always move in the obvious direction which can catch people off guard. You only have to look at the reactions to the US elections and Brexit, where markets plummeted initially only to rebound strongly hours later. This is why we never recommend clients leaving positions unhedged as we are open to wild swings.
Before this we have the ECB monthly meeting where the market was rife with rumours after reports of a leaked draft. The leaked draft supposedly showed the central bank revising higher its GDP forecast while also lowering its inflation forecast through 2019. The rumor was enough to see euro fall against its major peers as the news concerned markets that it would result in a push back on the timing/pace of future tapering. This would be a bit of a U-Turn for the ECB as only as recently as March they revised these figures higher. Mario Draghi will certainly be put under the cosh here as pressure has mounted from both internal and external parties to drop his negative downside risk rhetoric.
The Euro is up 7 percent against the greenback since the beginning of the year, any indication that inflation expectations have been lowered and we could see real pressure on the euro. Yesterday the release of Comey’s written answers didn’t show any significant revelations but that doesn’t mean something won’t surprises markets when he speaks later on today.