Super Thursday – Politics and Monetary Policy Take Center Stage

Thursday June 8: Five things the markets are talking about

Pick your poison. Today is a pivotal day for capital markets with three major events – ECB monetary decision, U.K Parliamentary elections and Comey’s U.S senate testimony – expected to influence the directions of the various asset classes.

If today’s U.K election brings a hung parliament, some sterling bulls think that a Labour-led coalition could be the most ‘positive scenario’ for GBP (£1.2964).

Under this scenario, the pound is expected to plummet on the headline – PM Theresa May would have to resign, and the pending Brexit negotiations would have to be postponed. Pound “bulls” sees this type of price action as a potential buying opportunity. Why? It would require the Labour Party to negotiate with the pro-EU Scottish National Party and Liberal Democrats, which could result in a commitment to hold a second referendum and a greater likelihood of a softer Brexit.

However, if the Conservative Party increases its majority, it could be considered either positive or negative for the pound, depending on your timeline.

PM May winning more seats would provide GBP some short-term relief, but how high it goes, that depends on the increase in number of seats. The Conservatives held 330 seats when Parliament was dissolved on May 3. Some polls have suggested that the Tories are inline for a 74-seat majority, the biggest since Thatcher.

In the longer term, the Conservatives’ plan to take the U.K out of the single market is expected to weigh on GBP, in part due to tough Brexit negotiations, thus any meaningful rally may be considered to be short lived.

Note: The first big event is the ‘Exit Poll’ at 22:00 BST/17:00 EDT. In 2015, the first exit poll correctly predicted a Conservative majority – contradicting all polling – it turned out to be right. The second exit poll, 15 or so minutes later, predicted an even bigger majority and got the final number spot on.

This morning’s ECB policy decision – 07:45am EDT, no rate change is expected, but the central bank may drop the reference to “downside” risks to growth, while reiterating a weak inflation outlook – is followed by Mario Draghi’s press conference (8:30am EDT).

Stateside, ahead of his Congressional appearance today, the former FBI head James Comey released a prepared testimony yesterday saying the president asked him to end an investigation into the former national security adviser.

1. Stocks mixed results

The aforementioned geopolitical worries have many investors wading to the sidelines to seek sanctuary, at least until there is more market clarity.

In Japan, the Nikkei and the broader Topix gave up early gains to close lower (-0.4%) overnight as the yen (¥109.89) rallied in a market already on tenterhooks. Data earlier in the day showed Japan’s economy growing less than the government initially reported for Q1. Final GDP was revised lower by its biggest margin since 2009, + 0.3% vs. +0.6%e q/q.

In Hong Kong, the Hang Seng and the Shanghai Composite Index each increased +0.3% on the back of stronger China data – exports rose +8.7% in May vs. +7.2% expected gain.

In South Korea, the Kospi index increased +0.2% – North Korea launched a series of short-range missiles overnight.

In Europe, indices are trading higher across the board in thin trading as the markets await the ECB rate announcement and the U.K election results.

U.S stocks are set to open in the “black” (+0.1%).

Indices: Stoxx50 +0.3% at 3561, FTSE +0.1% at 7483, DAX +0.3% at 12714, CAC-40 +0.2% at 5277, IBEX-35 +0.3% at 10909, FTSE MIB flat at 20743, SMI flat at 8880, S&P 500 Futures +0.1%

2. Oil off one-month lows, but supply gloom caps gains

Oil has pushed a tad higher from yesterday’s one-month low print, which came about after an unexpected surge in U.S inventories and the return of more Nigerian crude to an already oversupplied market.

Note: Yesterday, Royal Dutch Shell lifted its force majeure on exports of Nigeria’s crude, bringing all the country’s oil grades fully online for the first time in 16-months.

Brent crude is up +43c at +$48.49 a barrel, having fallen -4% yesterday, while U.S crude (WTI) has rallied +38c to +$46.10 a barrel.

The market has also come under pressure from news of rising output from Libya, which together with Nigeria is exempt from the production cut made by OPEC.

The “big” dollars actions and investors risk appetite to today’s highlighted geopolitical events will mostly influence today’s crude price movements.

Ahead of the U.S open, gold is holding steady (-0.1% to +$1,285.92), hovering close to its six-week high print in Tuesday’s session, on weaker global stocks and amid dwindling expectations for aggressive U.S rate hikes this year.

3. Global yields looking for direction

Currently, U.K Gilt yields are little changed, as are rates in Germany (Bunds) and France (OAT’s).

However, yields on 10-year German Bunds (+0.27%) maybe set to rise whether the ECB delivers a ‘hawkish’ surprise or it opts for a ‘neutral’ stance. If the former happens, bond prices are expected to drop more aggressively, backing up yields, on more solid prospects of asset purchase tapering and a quicker rise in policy rates.

In Japan, yields backed up more aggressively in the overnight session on hearsay reports that the Bank of Japan (BoJ) is recalibrating its communication policy to talk more openly about exit strategy – 10-year JGB’s backed up +5 bps to +0.06%, while the on 20-year bonds rose +3 bps, climbing for the first time in five days.

Elsewhere, U.S 10-year Treasury yield rallied +1 bps to +2.18%.

4. Dollar looking for guidance

The EUR (€1.1234) is a tad weaker ahead of a ECB decision at 0.7:45 EDT and President Draghi’s press conference at 08:30 EDT. The ‘single’ unit has gained recently on expectations the ECB could hint at scaling back monetary easing after recently improved eurozone data. Yesterday, the EUR fell (intraday low €1.1208) following an anonymous report that the ECB would cut inflation forecasts. This would suggest that the current price has reduced inflation forecasts somewhat priced in, which could reduces the scope for more EUR falls.

The pound (£1.2961) is holding below the psychological £1.30 level as voting gets underway in the U.K for the Parliamentary elections. How high the pound will surge will depend on how wide the expected majority will be.

Elsewhere, USD/JPY (¥110.06) is higher after Japan Q1 Final GDP was revised lower. The pair initially stalled at ¥110 area after reports circulated that BoJ was considering ways of communicating any shape of Japan’s QE exit.

5. Eurozone economy grows at fastest rate since 2015

Data this morning shows that the eurozone’s economy grew at a faster rate than previously estimated during the first three months of 2017 as investment spending continued to rise.

The European Union’s statistics agency said that in Q1, GDP increased by +0.6% from Q4, 2016, and by +1.9% from Q1, 2016.

Note: Eurostat had previously estimated q/q growth at +0.5%, and y/y growth at +1.7%.

This translates into annualized growth of +2.3%, up from +2.1% in Q4. During Q1, the U.S economy grew by +1.2%.

Despite the pickup in growth, the ECB remains cautious about removing the stimulus they have provided over the years, awaiting clear evidence that the recovery is stoking underlying inflationary pressures.

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