Unbelievable Mrs May

Not even the Sun coming out for Theresa May could save her. Mrs May’s gamble to strengthen her hand has in the end backfired and she is likely to have more time with her family in the coming months. Overnight indications from the spread betting platforms is a surprisingly muted one. The pound lost about 1.5% against the US dollar and the FTSE 100 is indicating to be modestly lower at the open. There must be a strong possibility of another election in the coming months under a new conservative leader. The bond market could well be critical as to how the equity market will react to the result in the coming days. 

The General election has been one example of political instability, however, there are several other examples around the globe. The former head of the FBI is testifying to the Senate Intelligence Committee on meetings he had with the US President. The Middle East has also seen political tensions rise as the Saudi’s along with a few others have severed relations with Qatar. Tensions have also been rising between China and the US in the South China Sea. Brexit continues to make headlines whilst investors wait to see how the negotiations will play out.

Recent US economic data may have weakened just as the Federal Reserve looking to raise rates again. In contrast, robust economic data for Europe has seen investor sentiment in the region continue to rise. This week two surveys, the Sentix recording investor sentiment for the euro area is at a ten-year high, another a German Investor sentiment is at an all-time high. Despite this optimistic picture, Mario Draghi left interest rates unchanged on Thursday, as expected, with the only concession to the recent improvement in the euro area economy to remove the previous statement suggesting rates could go even lower.

One newsworthy event this week that markets took in their stride was the purchase of Spain’s Bank Popular by Santander for 1 euro. EU officials declared the bank likely to fail as depositors caused a run on the bank. The depositors may have been protected but the holders of subordinated debt were converted to equity and equity holders were “bailed in”, meaning they will lose their investment. This event goes to highlight the risk of owning contingent liability or coco bonds to investors. Santander issued 7 billion euros of debt which the ECB with the continued bond purchase program will end up purchasing. In the end is this a bail in or bail out is a moot point?

The Financial Times reported on Thursday that the risk premium that investors demand to hold the highest quality US junk bonds has narrowed to its lowest level in almost a decade. As investors continue to hunt for yield. Ever since the financial meltdown in 2008 equity markets has been climbing a wall of fear, are they are supposed to. The point that it all ends is when euphoria enters and fear disappears. Are we reaching that point? With investor surveys such as the ones out this week, might be getting closer.

Posted on June 9, 2017 .