Well no-one saw that coming

They say a week is a long time in politics. Well it was certainly true last week as we have had enough events transpire in the past few days to last a month. Chinese GDP beating expectations, a possible war with North Korea, US consumer confidence data, and banks earnings to mention but a few. Then came the announcement on Tuesday that Theresa May has called a general election on June 8th. Sterling rallied and the stock market fell whist gilts hardly moved. This is clearly a move designed to ensure she has a strong mandate from the populous to negotiate with the rest of Europe, at the same time countering the influence Scotland has. We have argued that sterling could hit 1.30 against the US dollar before it hit $1.2 and this announcement reinforces that view. There will be some uncertainty and this has been reflected in the move in the stock market on Tuesday, however should Theresa May keep her strong position in the polls the UK assets and sterling could once again be considered a haven with the increased uncertainties around the globe. The swing factor maybe whether the labour party will go into the election with Jeremy Corbyn, or will they find a way to oust him in time and find a suitable replacement?

Whilst the general election will now dominate the headlines, one should also keep an eye on broader events. The threat of an increase in geopolitical tensions tends not to worry markets overly, aside from a knee jerk reaction. “Buy on a war” is the saying, if war is averted the market will rise on relief, if not there may well be things to worry about aside from your investment portfolio.

Macro data and company earnings are the ultimate driver. The US banks kicked off the first quarter earnings season last Thursday. Expectations for a strong bounce back this quarter are high after many quarters lacking in earnings growth. The energy sector strong contributor to this recovery.  JP Morgan and Citi got the season off to a good start ahead of the Easter break, beating expectations on strong loan growth. On Tuesday Bank of America kept the momentum going, Goldman Sachs however failed to meet the high expectations and slipped in early trading on Tuesday. This will be a busy week with over 300 US companies expected to report. There are also several heavy weight UK companies due to report including BAT, GKN, Unilever and Bunzl.

Aside from British politics, the much awaited first round of the French Presidential election takes place on Sunday. The extremists on either side of the left and right both seem to favour a change in the status with the rest of Europe, and are holding their own against the more centrist candidates.

On the macro front the market received better than expected consumer confidence data on Thursday. However, this did not stop yields on 10 year US treasuries falling again. The concern that the Trump reflation trade may be losing more momentum was added to when the US treasury secretary confirmed over the weekend that the implementation of the tax reforms will be delayed by the failure of the healthcare bill.

All this uncertainty has led, according to the Financial Times, to the Morgan Stanley risk aversion index reaching lows post Brexit and Trump election.

Posted on April 18, 2017 .