Both the FTSE 100 and the FTSE 250 indexes held up this week into the General Election vote. Possibly the fact that the 250 index, which is more exposed to the UK economy, held up despite the tightening opinion polls is more of a surprise, due to its greater domestic bias. The pound rose on the week against the US dollar, gilt yields hardly moved. This would suggest that the markets are either complacent or confident that the opinion polls are reflecting a tighter race than the eventual outcome. The bookmakers still strongly favour a Conservative victory, as they remain odds on.
There will be few places for investors to hide on Friday should Jeremy Corbyn win. Sterling will get battered, creating more inflationary pressures, eroding cash. Overseas investors will sell any UK related assets, gilts yields should also rise as raising money in the debt market will become difficult. It feels hard to focus on any other events until Thursday is out of the way.
US equities hit another intraday high on Friday after a disappointing jobs report. The yield on US treasuries fell to a seven-month low. The following week the Federal Reserve announce whether they will be moving interest rates higher for the second time this year. The odds remain in favour of the Federal Reserve acting, however futures trading suggests that the possibility of a move again in September are fading. Equities investors continue to see the Goldilocks scenario of modest growth, abundant liquidity and minimal inflation. The dilemma the Federal Reserve continually grapple with is a tightening labour market, which normally leads to higher inflationary pressures, however so far this has not been the case.
Looking to the week ahead the main event, particularly for anyone in the UK will be the General Election on Thursday. Aside from that there will be the usual breadth of economic data from the US economy. These will include on Monday factory orders for the month of April and a selection of services data. On Tuesday, we get the IDP/TIPP Economic Optimism Index which measures Americans opinions and outlooks on the US economy. The survey is a relatively small sample size however the index has been dipping from the beginning of the year.
On Thursday, we get the latest estimate for GDP growth in the euro area for the first quarter. Later on Thursday we get the ECB rate decision. Expectations are for the rate to remain where it is, however the tone of Mr Draghi’s conference post the announcement may be interesting. Investors will want to see if he keeps his relatively dovish tone or if he makes some concessions to Germany’s concerns that rates remain too accommodative.