Europe
Surprise is what causes sharp moves in asset prices, so the surprising result of a Conservative Party majority government against almost unanimous expectation of a hung parliament sent stocks in the UK flying, some as much as 10% higher.
The Conservative victory caused the FTSE 100 to surge back above 7000 to its May high while the broader and more UK-focused FTSE 250 made new record highs.
Stocks will typically jump after a Tory election win, the reason stocks jumped so much is that a majority government is perceived to reduce uncertainty and because a majority simply wasn’t expected. The quick removal of uncertainty presented by a hung parliament, in effect beat expectations.
Markets breathed a sigh of relief at the continuity of a Conservative government and the reduced threat of the Scottish National Party destabilising the union through a coalition with the Labour party.
The sectors within the UK stock market that were most exposed to some of the interventions planned in The Labour Party manifesto were those that jumped the most on the Conservative win.
No price caps or suggestion of breakup of the major utilities companies meant Centrica (LONDON:CNA) was the top riser. No rent cap or mansion tax sent homebuilders including Barratt Developments (LONDON:BDEV) and estate agent Foxtons (LONDON:FOXT) soaring. Banks were all trading significantly higher as chances of the bank levy increasing were reduced. Transport companies including Stagecoach saw some big gains with the threat of partial nationalisation gone.
The longer term issue of the EU referendum scaring away investment has been put aside by markets which were more focused on the immediate positive implications for the business environment of a majority Conservative government.
There was a mildly positive reaction in most of Europe to UK elections, aided by a recovery in bond markets from the sell-off earlier this week.
It was only after news of over 200,000 jobs created in the US during April, suggesting the beginning of a spring rebound in economic activity, that European markets made most of the daily gains. The German DAX jumped over 2%, regaining 11,600 for the first time since the sharp sell-off on Tuesday.
US
The Dow added over 200 points on Friday’s US market open after an April non-farm payrolls that had a bit for everybody.
The US produced 223K jobs in April causing the unemployment rate to fall to 5.4% while average earnings growth slowed to 0.1%, this compared with expectations of 224K, 5.4% and 0.2% respectively.
The 200 – 250 mark is the level of jobs creation stocks are most comfortable with; not too much to risk an imminent rate hike, but not so little as to suggest the economy is stalling. The weak wage growth, an important indicator followed by the Fed is another reason to think the Fed will be hesitant to hike rates this side of September.
Swiss agrochemical business Syngenta rejected a huge $45bn bid from US rival Monsanto.
FX
The US dollar was mixed against major currencies on Friday after the non-farm payrolls report came in essentially in line with expectations.
The pound jumped late on Thursday after the first exit poll suggested a Tory victory with Labour having lost almost all seats in Scotland and a disaster for the Liberal Democrats. The gains in the pound continued as the results came through in support of the exit poll. GBP/USD leaped to the highest levels since February while EUR/GBP dropped as much as 2.5% with the election result deemed the best for the UK economy.
Commodities
Having almost reached $70 per barrel on Wednesday, Brent crude oil dropped back to $64 in a deep sell-off despite US weekly inventories having dropped for the first time in four months. Now that oil prices have bounced so strongly from the lows that made production unprofitable at many US oil explorers, the risk is that they start drilling again. Shale oil explorer, Pioneer Natural resources has indicated it will deploy more rigs while a number of oil companies including Chesapeake have already raised their production outlook.
A US unemployment report short of surprises left gold and silver slightly higher on Friday in line with a mixed US dollar and lower treasury yields.
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