Equities
Markets have reacted with cautiousness to political uncertainty that is seemingly flying in on multiple fronts. Investors are not panicking but have been paralysed into inaction over the endless possible outcomes of the US election and Brexit.
The FTSE 100 was stung by a sharp rally in the pound. The index gave up early gains thanks to a rally in Sterling after the government lost its high court ruling to trigger article 50. The effect of a stronger pound on multination offset expectations-beating bank earnings in Europe giving a positive read-across to financial shares.
The government will appeal the decision so it’s not game-over yet. Were the government to be overruled in its appeal, there is a real prospect that Brexit can be overturned. Still, assuming the majority of MPs would be willing to vote against their constituency might be overly generous. In any vote given to parliament on article 50, self-motivation will guide most MPs to vote the same way their constituencies did in the EU referendum.
The prospect that parliament would vote against the referendum outcome is now a real possibility, but is unlikely. Any uncertainty relieved by Britain not leaving the EU would pale in comparison to the constitutional crisis created were parliament to vote against the will of the people.
Should parliament vote against Brexit, the only possibility is a general election whereby the public can be given another opportunity to exercise their democratic rights.
Good-looking results today from ING, SocGen and Credit Suisse (SIX:CSGN) is garnering further interest in the banking sector, where higher bond yields already bode well for future lending margins. Shares of Royal Bank of Scotland (LON:RBS) and Barclays (LON:BARC) were higher in a positive read-across. The signs of recovery in European bank earnings saw RBS eyeing its first daily gain in five after reporting its own earnings.
Stocks in the US opened in the positive on Thursday, opening up the possibility that the S&P 500 can end a seven-day losing streak. The S&P has only had 22 seven-day losing streaks in its history and the last two happened during the financial crisis and European debt crisis. The gains come despite some heavy losses for Facebook (NASDAQ:FB) shares which fell 55 after the firm issued a warning on future revenue growth.
FX
The British pound was the stand-out gainer on Thursday in an otherwise quiet day for FX markets following the Fed meeting and ahead of US non-farm payrolls data to be released Friday.
The possibility of no ‘Article 50’ being triggered and the Bank of England backing off from a rate cut are two clear cut reasons to be near-term positive on Sterling.
The BOE kept policy unchanged as expected and backed away from further rate cuts, saying it is now policy-neutral. It’s a huge turnaround from previous guidance of more monetary easing this year and took a bit of explaining from Governor Mark Carney in his press conference. The Bank of England clearly got their forecasts wrong, and to its credit, has accepted it and readjusted them.
The BOE raised its inflation forecasts because of the crash in the pound, as expected. The biggest surprise came from the MPC’s statement on inflation. It said it has a “limited tolerance for above-target inflation.” If inflation reaches the Bank of England forecast of 2.7% in 2017 and the banks acts according to today’s guidance, the UK could receive its long-awaited rate hike.
Mixed economic data including durable goods orders meeting expectations and a surprise decline in the service sector according to ISM non-manufacturing data meant the US dollar was mixed on Thursday.
Commodities
The price of gold has paused at the $1300 big figure, which could limit near-term gains. Gold’s value as a hedge should be firmly in place up until the results of the USD election, and quite likely past it. The initial relief of a Hillary Clinton victory would likely be gold-negative but the possibility of impeachment-generating scandal from her emails will be the kind of destabilising force that is beneficial to safe-havens.
Some short-covering in oil soon gave way to another bout of selling, pushing WTI crude below $45 per barrel. OPEC has said it is “deeply optimistic” a cut will be implemented but rising US production and the exemption of several producing-nations has the seen the market call their bluff.
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