UK investors came back from the Easter break reflecting the weather, with a sunny disposition. A recovery in US stocks on Monday, helped by a purchasing managers reports for March no worse than expectations, renewed takeover activity as FedEx makes an offer for TNT, along with a decent overnight performance from Asian markets all contributing to the bright start. The FedEx acquisition of TNT continues to highlight how American companies will probably take advantage of the stronger currency they currently enjoy, to buy overseas assets at a time when organic revenue growth is hard to come by in the current economic climate. We pointed out last week that there have been nearly $1trn worth of deals so far this year, out of a total global market capitalisation of around $65tn.
Electioneering is now in full swing; opinion polls will be released almost on a daily basis. History has recorded that opinion polls are often a poor reflection of what may be the result of any election. Bookmakers are often a far better predictor of outcomes as the Scottish independence vote demonstrated last year. At present the bookmakers are predicting a 2% chance of a Labour overall majority against a 13% chance of a Conservative one. On the outcome for seats they predict 280 for the conservatives, 269 for Labour, 33 for Liberals and 41 for the SNP. We will be watching how these predictions change in the coming weeks.
The other barometer for the election outcome is likely to be the behaviour of sterling. The pound on a trade weighted basis is close to 12 highs, a much as CEO's moan about a strong currency, the reality is with a large current account deficit it is important the pound stays strong. Fears from external investors that the election could leave the country in a political vacuum and decide to withdraw assets could put pressure on the currency. The last thing the Bank of England needs to face is the position of having to raise interest rates to defend the pound.
Later today the earnings starts for q1 2015 as Alcoa reports its earnings. Q1 earnings estimates for US companies have been reduced due to the impact of the currency to the point where no growth in earnings is expected in the first half of the year. That may make expectations slightly easier to meet.