More Proof Markets Dislike Uncertainty

Short US equity index trades continue to yield results for our prop desk, whilst a range of long sterling positions are also coming good. These include a GBP/NZD trade placed ahead of the weekend break, along with a rather more opportunistic GBP/AUD trade picked up in the last few hours.

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Given the relative dearth of economic data on the table it does seem as if the markets are struggling to drag themselves back from the Easter break, but that shock announcement over a snap general election in the UK certainly provided some much needed momentum. With this and the uncertainty of the French election looming large, our earlier assessment - that it’s the political rather than economic agenda which will influence markets in the short term - continues to hold true.

Fundamental Analysis – More Proof Markets Dislike Uncertainty


The British pound has been liming along wounded since the Brexit referendum last summer, but yesterday’s surprise announcement by UK Prime Minister Theresa May that a snap general election would be held had a galvanizing effect on the currency. The market’s clear belief is that the incumbent party will win again, and with a bigger majority. This in turn will make for a cleaner break when the Brexit negotiations conclude – something that has driven major GBP crosses out to six month highs. Success in today’s vote in Parliament - which is required to approve the early election - is a foregone conclusion, but the risk is that the vote in early June doesn’t return the result that’s expected. Early polling suggests it will, but with the centrist Liberal Democrat party likely to make sweeping gains from their diminished current position, they could be the deal-makers again as they were in 2010. Given they are expected to be running on a ticket that promotes retaining single market access, we should be bracing for further volatility as this campaign unfolds over the next seven weeks.

Risk mitigation continues to lend support to the Japanese Yen with USD/JPY declining once again during yesterday’s session and establishing a level below the 200-day moving average. Markets remain on edge over the next steps in terms of US foreign policy and we’ve seen some mixed reports over the intentions of the US naval fleet in the Pacific emerging over the last few hours. The pair does risk drifting into oversold territory especially with the Fed’s commitment to further policy tightening, although with little US economic data on the cards for today, further weakness at least in the short term may still be seen.

Eurozone inflation prints are due at 9am GMT this morning and we expect these numbers to attract some interest. The ECB has pushed back against any need to for rate hikes on the basis that the recent spike in inflation was temporary, although the reversion seen in energy prices during March could be seen as provide some misleading direction here. The weekend’s first round presidential election in France is also going to continue acting as a drag on sentiment for the common currency – this remains an open contest and the result could yet serve up a far bigger blow for the European project than we saw with Brexit.

This article comprises the personal view and opinion of the STO Investment Research Desk and at no time should be construed as Investment Advice.

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