Market Bulletin (06/06/2017)
Mayday?
“If you want to make God laugh,” said Woody Allen, “tell him about your plans.” Theresa May appears to be learning the lesson the hard way.
Just a few weeks ago, it all looked so simple. No Conservative prime minister in modern history has enjoyed such a wide lead in the polls as the prime minister could boast on 18 April, the day she called for an early election. The stage was set for a 100-seat majority in short order, providing her with a strong electoral tailwind as she headed into EU exit negotiations, and a large enough majority to prevent diehards from either the Remain or Leave camps from calling the shots in talks with Brussels.
Yet an initial poll surge quickly reversed, as the prime minister was stung by reneging on her initial pledge not to call an early election, a policy U-turn on care costs, and a relative absence on the campaign trail – and in TV debates. Meanwhile, Labour quickly gained momentum, as manifesto promises and campaign energy buoyed poll scores. With just three days to go, the polls are at their narrowest in three years.
Sterling and gilts tend to offer the best short-term gauge of investor sentiment towards the UK, and both certainly offered up views last week. Sterling experienced significant volatility over the five-day period, and was the second-worst performing major currency against the dollar in May, but ended last week up against the greenback, after impressive manufacturing orders data for May was published – and as the US published a disappointing payrolls report. Gilts, on the other hand, saw yields fall to new lows, indicating investor nerves ahead of Thursday’s vote.
Factory figures came as some relief after a slack first quarter in which UK GDP growth was equal slowest among G7 countries – only Italy’s rate was as low. Purchasing Managers’ Indices (PMIs) suggested that the current quarter is on a better course – money and credit trends, and construction indices, hinted at a second-quarter upturn.
Sterling’s underperformance in recent weeks has been a boon for UK-listed stocks, and last week both the FTSE 100 and FTSE 250 hit all-time highs. In great part, this reflects buoyant corporate earnings in the first quarter, not least in the US, where the S&P 500 has set 20 closing highs this year – and ended last week up 0.87%. Nevertheless, energy and mining stocks limited FTSE 100 gains for the week to just 0.23%.
It was (yet another) significant week for technology majors too, as Amazon joined a select club of companies whose shares are valued at more than $1,000. Meanwhile, Google published plans for its new European headquarters in King’s Cross – the building will be as long as The Shard is high – another tech victory for London.
Yet all such developments were quickly sidelined over the weekend, following a vicious attack at the heart of London on Saturday evening that killed seven people. Campaigning was briefly halted, but the deadly strike failed to dislodge the election timetable and campaigning had fully resumed by Monday morning.
Narrowing polls
Markets dislike uncertainty, and fears of a hung parliament loomed increasingly large last week; yet they may well prove overwrought. For all the opinion shifts of recent weeks, the majority of polls continue to put the Conservatives on course for a parliamentary majority, and Labour’s improved polling numbers would require a large spike in youth voter participation if they are to be realised at the ballot box. Several bookies offer odds of 6–1 for a Labour win.
If Labour pulled it off, there might be some short-term adjusting on the markets and increased volatility until the new government was in place. Yet it is likely Labour would need to form a coalition – in such circumstances, the more radical policies tend to be shelved, as the Conservatives experienced in 2010. Even if it had enough votes to go it alone, there is no certainty that all Labour MPs would vote for renationalisations – probably the most radically leftist element in the manifesto. Moreover, markets might even warm to some other elements – last week Jeremy Corbyn said that it would be a disaster to lose access to the single market, and he has resisted promising major cuts to immigration – both these positions tend to be popular with investors, and they distinguish him from Theresa May.
The expected outcome is that the Conservatives win a smaller majority than once anticipated. That will make EU negotiations more of a Tory balancing act, as the prime minister would need the votes of many of the parliamentary party’s most devout Remainers and Leavers alike when she seeks approval for her new deal with the EU. She will not have long to get her way – some commentators say negotiations can only begin in earnest after Germany’s federal elections in September, effectively giving negotiators 12 months to strike an accord before seeking parliamentary ratifications across Europe. Whether a shorter timetable helps or hinders the prime minister remains to be seen.
Changed climate
In the US, a different kind of breakaway transition was inaugurated last week as Donald Trump pulled the country out of the Paris Agreement, a 195-country deal on limiting emissions that was adopted by consensus in late 2015. The US president said that he had done so in the interests of US jobs and businesses. He may win plaudits in the US rust belt, but a slew of significant business figures had urged him not to pull the US out, among them Apple, Morgan Stanley and Unilever. There were also loud criticisms in Europe. Angela Merkel, who only the previous week had publicly lamented that Europe can “no longer completely rely on the US and UK”, said that the US decision was “utterly regrettable – and that is choosing very restrained language”.
US jobs figures continued to tell a positive story overall, even if the immediate trends were more mixed. Private-sector hiring rose significantly according to the ADP National Employment Report, but US non-farm payrolls data failed to meet forecasts.
Meanwhile, eurozone indicators continued to paint a rosy picture, with strong earnings data and positive growth indicators. Factories in the eurozone hired at the fastest pace in two decades last month, and PMIs showed a six-year peak. Moreover, Ireland announced that it would be selling off a 25% stake in AIB, one of the Irish banks hardest hit in the financial crisis – a landmark moment for the country. These were among the developments that helped to push the euro up by more than 2% against the dollar for a second straight month in May.
Yet although the eurozone economy grew faster than the US or UK in the first quarter, the union faces the prospect of a high-risk Italian election – comments made last week suggested the vote could be as soon as this autumn. The development helped limit gains on stock markets, and the Eurofirst 300 ended the week up just 0.3%.
For the moment, however, all eyes will be on the UK for Thursday’s general election. Some short-term volatility remains a strong possibility but, despite the surprise votes for Brexit and for Donald Trump and the recent turnaround in the polls, most bookies and pundits appear to agree that, in the end, it will be May’s day after all.
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